Anyone holding Hewlett-Packard Company (NYSE:HPQ) should be eager for HPQ to split up, if only because they’ll have a choice as to which part of the company they want to ride down.
The market may be forgiven for taking a somewhat cynical view of the break-up. It seems like HPQ is always in restructuring mode to little effect. The impending split is sort of the mother-of-all restructuring, but given the weaknesses in both businesses, neither may be worth a position.
HPQ is set to cleave itself into a company that sells software, servers and networking gear to businesses, and a company that sells PCs and printers. The idea is that the enterprise business will have a bright future in the era of cloud computing, mobile computing and big data. As such, the business will have a growth stock attached to it.
On the other side, PCs and printers will be represented by a redoubtable dividend stock. True, the PC market is in secular decline because of the rise of mobile computing and the cloud, but it still generates a lot of cash.
It’s a good plan, but only because the alternative of keeping Hewlett-Packard whole is so obviously not working. It’s possible that the split will serve as a catalyst for HPQ stock, but the market isn’t excited about it for now.
Indeed, HPQ stock essentially traded sideways after it announced the split in mid-March. It rose sharply Friday thanks to better-than-expected quarterly earnings, but HPQ stock is still down 13% so far this year.
HPQ Revenue Drops Across All Segments
Perhaps that’s because the post-split companies are still going to have a hard time growing revenue. In the most recent quarter, revenue fell in all of HPQ’s major divisions. Turning one shrinking business into two shrinking business isn’t all that appealing.
The strong U.S. dollar whacked HPQ’s top line in the quarter, but the greenback can’t be blamed for everything. Revenue fell a steep 7%, marking the 14th time in the last 15 quarters that revenue has declined.
As part of that weakness, the software segment posted an 8% drop in revenue, while enterprise saw the top line retreat by 16%. This is the part of HPQ that’s supposed to be a growth stock after the split, but it looks like the only way it will be able to increase revenue will be for the new company to go on a shopping spree. (The dowdy PC segment reported a 5% decline in revenue.)
For the most recent quarter, Hewlett-Packard beat Wall Street earning estimates by a penny. It also reaffirmed its full-year outlook, although the range of 83 cents to 87 cents a share is almost entirely short of the Street’s forecast for 87 cents. An earnings beat is an earnings beat, but then the company has exceeded analysts’ average forecast in three of the past four quarters, and it hasn’t done much for HPQ stock.
Finally, as detailed by HPQ, the split into two companies is going to be tremendously expensive, with write-offs coming to as much as $3 billion a share.
If you own HPQ stock you should hang on until after the split. At that point you’ll have shares in two different companies with different profiles, and perhaps one — or both — will be suitable for your portfolio despite them struggling to drive revenue gains.
If you’re considering buying HPQ to get in on the split, don’t bother. The split of HPQ is certainly defensible. It’s a dramatic way to deal with problems that threaten to become existential.
But it’s hard to see HPQ stock doing much ahead of the break-up, and the resulting businesses are still going to struggle amid a strong dollar and stiffer competition, among other challenges.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
