HP or HP: Choose One
Tech’s biggest conglomerate is splitting up in November. The right one to bet on is the one that looks like a tobacco company.
Split a big company in two and the spun-of segment is likely to beat its peers in stock market performance over the next year or two. That’s the conclusion of academics such as Purdue’s John Mcconnell and Penn State’s Patrick Cusatis, who have studied hundreds of splits, going back to the 1960s.
This pattern is about to get a big new test as the granddaddy of all tech conglomerates, Hewlett-packard, gets ready to cleave itself on Nov. 1, after more than a year of preparation. It’s been a messy journey, with 30,000 announced layofs and more than $2 billion in separation expenses to date. HP’S stock price is of 17% since the breakup was announced in October 2014, versus a 4% rise in the S&P 500.
Still, past troubles can create cheap stocks. HP trades at just 7.3 times this year’s forecast earnings per share, making it one of the most beaten-down tech stocks in the S&P. Chief Executive Meg Whitman has been telling investors that “we’re shifting from turnaround to growth mode.” If she’s right, at least half of the Palo Alto, Calif. company should still have some kick.
Investors just need to decide which half. Legal flings defne the company’s businesscomputing side, Hewlett Packard Enterprise, as the entity being spun of. Yet Enterprise is acting like the surviving core business. It will end up with about 80% of the old company’s head count, about $52 billion a year in revenue—and a vast product line that ranges from servers and networking gear to business software and tech services. What’s more, Whitman herself is sticking around as its CEO.
HP Inc., the printing and consumer-computing business, is more likely the right segment to watch. Nobody will mistake it for a growth stock; the company’s own guidance to analysts suggests that revenue will decline about 2%, to $52 billion for the year ending Oct. 31, 2016. But the dowdy laptop and PC business remains mildly proftable and chews up very little capital, thanks to made-in-china sourcing. HP Inc. scratches out 3% pretax margins from its personal systems division, not a far cry from category leader Lenovo’s 5.3%. Add in the printing unit’s lock on high-margin ink cartridges and it’s clear why analysts expect HP Inc. to gener-