An investment in Hewlett-Packard (HPQ) right now is an investment in two different companies. Investors are waiting for the split that separate HP’s enterprise technology and software businesses, Hewlett-Packard Enterprise Co., from its printing and PCs, to be called HP.
In other words, Hewlett-Packard is splitting its exciting business from its boring business.
The current market capitalization of HP stock will be split in two, allocated to each of the company’s two new businesses almost equally. The market will then determine which of the two is most valuable with stock gains and losses.
While some investors may be temptated to wait and invest in one business over the other following the split, there are three few reasons that buying HP Stock now is the best policy.
#1 — HP Will Be Worth Owning
Hewlett-Packard’s fiscal-third-quarter report wasn’t exactly a vote of confidence for its printing and PC business. Revenue for printing and PCs declined 9% and 13%, respectively. However, there are still things to like about this business.
First, HP is the king of printing, and while it continues to decline at a mid-single digit rate, it is also a business where demand will always be present. Further, it remains a very profitable business.
HP’s printing business accounted for just 20% of the company’s total revenue during its last quarter. However, it generated $909 million of the company’s $1.21 billion in total operating income in the same period (75%). Thus, the profitability of printing will drive significant profits to the new HP, allowing for big dividends and buybacks relative to the company’s valuation.
As for PCs, yes, it is a declining business that has remained in turmoil for half a decade. However, last Friday, analysts at Citigroup and Wells Fargo called a bottom in the PC market’s decline, citing stabilized DRAM spot prices and growth in shipments during the first two months of the September quarter.
In other words, there are legitimate reasons to believe that the timing of this split is perfect, at least for the HP, and that makes the company’s printing and PC business worth owning.
#2 — Hewlett-Packard Enterprise Co. Will ALSO Be Worth Owning
The Internet of Things and mobile technology has sparked demand for data centers, yet somehow, a company like Hewlett-Packard that specializes in providing hardware and software in this space has struggled thanks to the rise of cloud services.
The split into Hewlett-Packard Enterprise Co will give the new company the opportunity to focus exclusively on this business with its own management team and board of directors, thereby creating new opportunities.
That said, it’s not like Hewlett-Packard’s enterprise segment has been awful, especially considering what it does.
According to Synergy Research, Hewlett-Packard’s share of the cloud infrastructure equipment market, hardware and software, is holding steady at 13%. This is an industry generating $16 billion per quarter and growing 25% annually — a fast-growing segment that already accounts for nearly 16% of Hewlett-Packard’s new enterprise business.
With Hewlett-Packard’s business now smaller and simpler, it can focus its energy on gaining market share in important markets like cloud infrastructure equipment, and that’s why enterprise is largely considered the favorite of the company’s post-split businesses. That’s also why investors might want to own stock in Hewlett-Packard Enterprise Co.
#3 — HP Stock Has Too Much Value to Pass Up
Currently, Hewlett-Packard is big and complex, and it lacks any realistic opportunity to grow. So it’s not entirely surprising HP stock has fallen 30% in 2015.
Once split, HP still lacks growth, but is very profitable as a high-yield, long-term investment opportunity whereas Hewlett-Packard Enterprise Co can actively pursue growth opportunities and will likely support a higher valuation multiple than HP.
Furthermore, the two companies should be able to effectively cut costs, find synergies and eliminate smaller businesses that don’t fit into the core PC and printing or enterprise segments. Most recently, HP announced that it will be cutting 25,000 to 30,000 jobs in the enterprise segment, therefore creating an additional $2 billion in cost savings annually.
Moves such as these will drive long-term shareholder value.
In my opinion, buying HP stock now is the best option for shareholders, because it gives investors access to both entities before job cuts, asset divestments and new leadership teams for both businesses that will likely drive shareholder value higher.
Furthermore, and perhaps most importantly, HP stock is very cheap right now. That may not be the case after the split. Right now, HP stock trades at less than five times next year’s expected earnings. Granted, that’s about one-third the price to forward earnings multiple of the S&P 500, thereby making HPQ ridiculously cheap.
As a result, given the reasons to own both entities, and very attractive valuation on HP stock, the time to buy HPQ is now, not later.
As of this writing, Brian Nichols did not own a position in any stock mentioned, but he may initiate a long position in HPQ within the next 48 hours.
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