Owners of a familiar PC stalwart started the weekend just owning one stock, but entered the new trading week as owners of two different tech names … the familiarly named HP Inc. (HPQ) and the still-recognizable Hewlett-Packard Enterprise (HPE).
The split came as no real surprise, of course. The company announced the breakup a little over a year ago, and made it clear from the onset which piece of the company would be moving under which umbrella.
Now that the event has finally happened, though, a closer look at HPQ and HPE — and what analysts think about them — is in order.
A Different HPQ
While it retained the ticker HPQ as well as the commonly used company acronym “HP,” the HP stock of yesteryear clearly isn’t the highly (overly?) diversified one investors had come to know and love.
As of today, Hewlett-Packard is going back to the roots that made it great. It’s under this umbrella that the company will make and market personal computers and printers, under the leadership of Dion Weisler, who up until now had served as the Executive VP of HP’s printing and personal computing systems division.
The general consensus is that this is the division that will have a tougher time thriving … not because Weisler is unqualified, but because printers and PCs are not only turning into a commodity, but because PCs themselves (and printers, albeit to a less degree) are being made somewhat obsolete by tablets, where HP struggles to maintain any kind of meaningful presence.
Printers and PCs have an estimated addressable market of nearly $800 billion per year, but it is a fiercely competitive market. Hewlett-Packard currently owns $50 billion of that market.
In that vein, market guru Jim Cramer may have hit one key problem — perhaps the biggest problem — on the head by explaining, “HP Inc. is very cheap versus the stock of Lexmark — it has to buy Lexmark or alternatively, it needs the yen to get strong to undercut the dumping of printers.”
Not all analysts and onlookers are as pessimistic, however. Credit Suisse analyst Kulbinder Garcha opined:
“We believe that HP Inc. has a solid franchise and a multi-faceted strategy to offset secular pressures in the Printing and PC end-markets. Specifically, we believe that as we gain visibility on printing supplies, the company can attain modest low single digit Operating Income growth. Combined with an extremely inexpensive valuation and significant cash return, we initiate with an Outperform rating and see ~60% upside potential.”
Garcha currently has a target price of $19 on HP stock, deeming it a buy.
Meet Hewlett-Packard Enterprise (HPE)
Meg Whitman, CEO of the pre-split company, will remain at the helm of Hewlett-Packard Enterprise, which operates in the bigger IT server and related-hardware arena. That’s estimated to be a $1 trillion market, and the enterprise division of HP sold $53 billion worth of goods last year.
It won’t be driving any new revenue as a provider of public-cloud services, however.
Although it took a shot in the public-cloud space, Hewlett-Packard Enterprise found it just couldn’t compete with the likes of Amazon.com (AMZN), which rents cloud-based server space out to anyone willing to pay the monthly access and a storage fee.
Rather, HPE is largely taking aim at the so-called private cloud, where it knows it can lead and bear fruit.
Jeffries agrees that this particular focus better suits Hewlett-Packard, suggesting that its plausible free cash flow — which will improve as the company works past recent headwinds, which in turn will drive operating margins from a range of 3% to 4% to a range of between 7% and 9% in the foreseeable future. In light of its cash flow projections, Jeffries says HPE is worth $21 per share.
Not everyone is as optimistic, however. Needham analyst Richard Kugele said of the newly-minted enterprise-oriented company:
“HP just completed the largest company split in history, and for that we give them enormous credit. Further, we agree that turning around a unified HP was too daunting a task given secular headwinds in nearly every segment. HPE is now free to acquire as necessary, complete another restructuring, and if unsuccessful (in theory) even sell itself. In the interim, we are very cautious on legacy tech companies (especially HPE) given major challenges in servers (white box), software (subscale), and services (EDS challenged with costs). Storage is mixed with 3PAR a decent platform in some areas but other traditional storage is declining faster. Finally, after 5yrs HPE is abdicating on cloud, shutting down Helion in 1/16. With comparably challenged companies trading at 8-9x EPS, we see the stock as already fully valued.”
Bottom Line on HP Stock
While it remains to be seen if the split will make it any easier for each unit to reach the next level of commendable turnaround efforts, it certainly won’t make things any more difficult.
There wasn’t a lot of synergy being enjoyed by either side of the company, simply because the two target markets and three core lines (servers, printers and PCs) are three distinctly different tech products with little to no cross-selling opportunity.
In that sense, the split could be viewed in at least a modestly bullish light.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.