Hewlett-Packard Is Splitsville

HP_New_Logo_2D.svgIt’s official: Hewlett-Packard (HPQ) and Hewlett-Packard Enterprise (HPE) have finally untied the knot. Monday saw the companies part ways, and investor reaction was initially mixed, though the bulls came out for the PC-and-ink business not long after, with that stock rising 13% on its debut day. Barron’s sees that legacy business as fairly valued at $14, right where it trades today.

But I’ll let the investor mag take it from here:

Multiples we view as conservative yield upside potential to current shares. Applying an 8 times price/earnings multiple to the PC/Printer business (below-industry-average) yields a per-share value of about $14 for HPI and applying an 8 times-12 times multiple for various HPE businesses yield a per-share value of about $20 ($34 combined). On a price/sales multiple basis, applying a 0.2 times and 0.7 times multiple to PC and Printer businesses, respectively, yields an HPI value of about $11 and applying 0.4 times to 1.5 times multiple for various HPE businesses yield a per-share value of about $25 ($36 combined).

Barron’s also rounded up analyst opinions on HPQ, and they generally agreed. Three analysts hit $14, $14.50, and $15 price targets, while another analyst went further out on the limb, initiating with a $19 target and expectations that the company would be able to staunch the bleeding and actually grow profit. Barclay’s also weighed in with a $14 price target, and noted that of the two businesses, Hewlett Packard was the better, given that it had fewer challenges.

Two significant positives of HPQ are the dividend and the very substantial buybacks. In total, a substantial portion of free cash flow – perhaps as high as 75% — will be returned to investors. And so investors who like cash cows should generally be pleased, especially if management can work a turnaround or even achieve just flat performance. An undemanding 8x multiple also makes HPQ easier to like.

As for Hewlett Packard Enterprise, that stock has been notably down since spin, off about 10% since its Monday debut. One analyst pinned a target of $19 on the Meg Whitman-led company, but Barclay’s was much more downbeat, at $13, citing risks to the company’s services business from the cloud.

Yet one of the better indicators of investment opportunity in a spinoff situation is where the CEO of the former parent went, and Whitman joined the Enterprise unit as CEO, of course. However, she is the chair of HPQ, too. One wonders if she’s keeping a toe in each pool to see which is warmer a few months later.

A cheaper HPQ would look appealing to me, but I’m on the sidelines for now, since there seems to be little disagreement that this unit is the more attractive. For more, Forbes has a solid rundown of the pros and cons of each company.

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