I'm changing my mind. After being short HP (HPQ) for the last 3 years, it's time to buy the beast. Why? The parts are worth way more than the whole. In fact, a great deal more.
HP went on a shopping spree buying $43 billion of tech over the last 6 years (and that's not counting earlier acquisition $25 billion Compaq), putting under one roof, computers, printers, calculators, cloud, software, servers, and services. HP had a case of ADD - the company couldn't focus as CEO after CEO went to the technology supermarket aisles and overspent on imprudent acquisitions. The massive buying didn't work out: Share price, operating margins, and earnings all plunged. Imagine, HP spent $43 billion in acquisitions in 6 years - its market cap is under $39 billion! Now that CEO Meg Whitman has sworn off large acquisitions, let's see what HP's got.
The Hidden Gems:
The parts are worth more than the whole. HP has valuable divisions hidden in the mishmash.
(revenue and operating income over trailing four quarters)
HP has a personal systems group (notebooks, computers) which it is combining with its printing division. That makes sense: The two divisions go together like peanut butter and jelly. PSG has become a low margin business as PCs have become commoditized.
Hidden are three gems: Services, servers and software. They are in sexier areas of tech with relatively high margins (although their margins are lower than some of their rivals.)
Comparing HP's divisions to the competition:
1. Personal Sytems Group and Image and Printing.
HP's PSG and Lenovo (OTCPK:LNVGY) have similar yearly sales. HP's division makes far more in profits than Lenovo (3.5 billion vs 0.5 billion). Figuring PSG/printing to be similar in value to Lenovo on a revenue scale, the divisions are worth $17 billion. That's a large discount considering HP's better earnings generation.
Granted HP's services division pales in comparison to that of IBM (IBM). Big blue has a far greater margin of profit. IBM is a much better services company. We'll discount HP services to a tenth of IBM's market cap. Result: An HP services worth $22 billion.
3. Enterprise Servers, Storage and Networking.
HP's server division compared to EMC (EMC). Again, EMC has much better margins. We'll discount HP server division to a fifth of EMC's market cap. Result: HP servers are worth $10 billion.
For comparison, I've selected Tibco Software (TIBX) and BMC Software (BMC). HP software is on par with Tibco and BMC's operating margin. We'll give HP a similar valuation minus a 20% haircut. Result: $10 billion of worth. (Quite the discount considering HP just bought Autonomy for $11 billion.)
In total, HP's parts are potentially worth a market cap of $59 billion, or $30 a share. And that's heavily discounted. Without the big markdown, HP could be a $40 stock.
HP may just be the most undervalued company in the Dow Jones Industrials. Now it's up to Whitman & Company to bring out that value. My suggestion: Package 'em up and spin 'em off.
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