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.

Forbes - - Technology - By ge­orge an­ders

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-

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