Most consumers know Hewlett-Packard (HPQ) as a manufacturer of PCs and printers. Hewlett-Packard is also one of the largest manufacturers of servers for the enterprise. Sometimes ago it acquired EDS, a very large technical services firm. Old timers may recognize EDS as a firm that made Ross Perot a billionaire.
When Hewlett-Packard hired Leo Apotheker as the new CEO, Hewlett-Packard announced that in the future it will emphasize software. Hewlett-Packard purchased Palm, the developer of Web OS.
Hewlett-Packard stock has fallen from a high of $49.39 to a low of under $30.00. One of the problems the company faces is that PCs and printers are low margin commodity businesses.
The real value of Hewlett-Packard is in its high end servers, proprietary software, and high margin services. Since the low margin PC business is such a big part of revenues, the high margin business lines are obscured. A breakup will simply unlock the value.
Today, there are reports that the company will spin off its PC and printer unit. Such a move will help the company shed its low margin business.
There is also a report that the company is close to buying Autonomy for about $10 billion. [Update: HPQ confirmed it is in discussions with Autonomy.]
Autonomy is based in Cambridge, England, and trades on the London stock exchange. Autonomy is the leader in providing software to search and organize data like emails. The company counts some of the largest corporations in the world as its clients.
When we apply the Quantitative Screen of the ZYX Change Method , the fair value of Hewlett-Packard is in the range of $45. to $50. There is an underlying assumption that the company does not botch up the transition in reaching these valuation numbers.
Leo Apotheker used to run SAP (SAP), one of the largest software companies in the world.
Hewlett-Packard is a member of Dow Jones Industrial Average. Any big up move in Hewlett-Packard will have a positive impact on ETFs DIA, QQQ, and SPY. Hewlett-Packard is not included in QQQ, but QQQ will be the main sympathy play.
Open Text (OTEX) is a company similar to Autonomy and may move up in sympathy. This development is negative for Dell (DELL) and Lexmark (LXK). Dell will face an invigorated competitor that is not shackled by a big bureaucracy. Lexmark has already been having trouble successfully competing with Hewlett-Packard in printers. A refocused big competitor spells trouble for Lexmark.
I will provide updates on my blog.
Disclosure: I am long HPQ, OTEX.
Additional disclosure: I have just gone long on HPQ and also given a buy signal on HPQ on the Real Time Feed of the ZYX Buy Change Alert. I also intend to go long OTEX and give a signal to buy OTEX on the Real Time Feed of the ZYX Buy Change Alert.