The controversial split-up of the former Hewlett Packard Co. into two new entities – HP Inc (NYSE:HPQ) and Hewlett Packard Enterprise Co (NYSE:HPE) is working wonders for investors.
Since the split became official last October, stock in the enterprise unit headed by former HP CEO Meg Whitman is up 36%, and it is delivering a small dividend as well.
The former PC-and-printer unit has had a rougher ride, but since hitting its February low of $9.02 it is up around 70% to its present price of around $15.49. Its dividend is even more generous, a yield of 3.2%.
As Max Bialystock might say, “Where did she go right?”
HPE Righting the Ship
The story at Hewlett Packard Enterprise so far is less about growth than a return to profitability.
The quarter ending in January showed net income of just $267 million on revenue of $12.724 billion, but the most recent quarter, ending in July, delivered net income $2.272 billion, $1.32/share, on revenue of $12.210 billion.
Operating cash flow is on the right track, coming in at $2.469 billion during the July quarter, and the balance sheet now shows less than one-quarter of assets burdened by debt, mostly of the cheap long-term variety, with $10.7 billion in cash to fund new investment.
The old HP was known as a cloud hardware failure, but Whitman has turned into a cloud software player, with a Flexible Capacity model for the Microsoft Corporation (NASDAQ:MSFT) Azure cloud that allows seamless integration of Azure’s public cloud and a company’s cloud-based data center, with a single pay-as-you-go bill for both the on-premises HP hardware and Azure.
Where the old HP had trouble competing, Whitman has created partners. It dropped software assets into Micro Focus International plc, a British company, taking 50.1% of the equity and $2.5 billion in cash. It did a similar deal with its enterprise services division, merging it with Computer Science Corporation (NYSE:CSC) in a transaction worth $8.5 billion.
What’s left is a smaller, but more focused company, one that can turn a profit and have a big place in the niches where it does participate.
HPQ: 3D Printing Gives It a Future
HP Inc. was supposed to be the “old tech” company, but its MultiJet Fusion 3D printer, first announced in 2014 and finally delivered this year, gives it a future.
Previous printers were slow, mostly dripping plastic onto small build planes. They were useful for prototypes and specialty products like false teeth or knees that needed precise manufacture rather than speed. By delivering its material as a powder, just like an ink-jet printer, HP hopes to deliver faster results and bigger products, as well as use many different materials with multiple colors.
There is new excitement in the field, with rivals 3D Systems Corporation (NYSE:DDD) and Stratasys Ltd. (NASDAQ:SSYS) finally headed in a positive direction as well, after years spent dealing with fall-out from an ill-fated move into consumer products.
Meanwhile, the company is looking to squeeze maximum profits from its existing PC and printer lines. Net income is up nearly 40% since the December quarter, rising from a pre-tax $699 million to July’s $1.081 billion, meaning the twice-year dividend of 25 cents is highly affordable.
The company did get its hand caught in the cookie jar recently, with a software update blocking use of third-party print ink cartridges which it is trying to defend but has somewhat reversed after criticism from digital rights activists.
The PC division has given up its number-one market share ranking to China’s Lenovo, with even Dell overtaking it in the U.S., but the new products are getting good reviews and the company seems dedicated to more profitable, high-quality work.
Time to Buy?
Whenever a stock gets a run-up like these two have, it’s tempting to say the company is overvalued and you should avoid it. But how do you call a 8.2 price-to-earnings multiple, which is what HPQ now has, overvalued? You don’t. Even HPE is still priced at a P/E under 10.
No, you have time to buy both these stocks. I have been a long-time skeptic about Meg Whitman and her vaunted, long-promised HP turnaround. But this is looking real.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
