As Hewlett Packard Company (NYSE:HPQ) is holding an analyst event today, let's see whether the company could split up and whether it is viable. Such choices would not be discussed in detail this week with investors, but the board/management should review them in the months ahead.
California-based HP provides products, technologies, software, solutions, and services to individual consumers, small-and medium-sized businesses (SMBs), and large enterprises, including customers in the government, health, and education sectors worldwide. The company's segments include PC and Printers, Enterprise Services, Enterprise Group, Software and Financial Services.
A sum of the parts valuation for HP's individual businesses yields an aggregate value of about $28 versus the current stock price of around $21. A split up makes sense as most comparable companies trading above HP's consolidated current multiple range of about 6 times.
First comes the PC and Printer unit. Under this segment, HP offers commercial notebooks and desktops; consumer notebooks, desktops; consumer and commercial printer hardware, supplies, media, and scanning devices, such as inkjet and Web solutions, laserjet and enterprise solutions, managed enterprise solutions, and graphics solutions.
The printer is more valuable for HP as the PC market remains weak and faces cannibalization from tablets and smartphones.
"Our analysis suggests that HP's printer segment is its most valuable business and contributes about $12 per share. We think that HP's printing business can generate stable margins even with modestly declining revenues as HP focuses more on multi function printers and maximizes profitability for its inkjet business," BMO Capital Markets analyst Keith Bachman wrote in a note to clients.
One caveat is that margins for this segment as a standalone entity would be lower owing to higher corporate general and administrative (G&A) expenses and a standalone sales force. Nevertheless, HP's printing business coul! d be worth more than $20 billion, or 55 percent of HP's current market value of about $40 billion. However, HP's PC business contributes less than $1 per share as PC revenues continue to decline.
Regarding its PC business, it could be tough for HP to improve its positioning in the personal systems segment given it has no credible product in the tablet and smartphone markets.
HP's enterprise business is its most challenged business owing to market share losses in the server business and increased competitive pressures. However, the biggest concern is around its hardware maintenance business which started to decline in the last quarter.
Enterprise Servers, Storage, and Networking segment provides industry standard servers; business critical systems; storage platforms; and networking products comprising switches, routers, and wireless LANs.
"We estimate that HP's hardware business, excluding the maintenance revenues, has about 7%-8% op margins. Despite our concerns, we estimate that HP's enterprise business contributes about $11-$12 per share," Bachman said.
Meanwhile, HP's services business is its most undervalued business given its current operating margins of 3 percent, which is significantly below those of most of its peers. Services segment provides consulting, outsourcing, and technology services to infrastructure, applications, and business process domains.
HP's services business could earn high-single-digit operating margins once the contract run-offs are completed in fiscal 2014.
"While our table reflects that the services business is worth ~$4 billion currently, we believe that this business could be worth more with stable revenues and improving margins," Bachman noted.
HP's software business contributes about $3 per share currently. HP's software business is a mixed pool of assets. HP's Software segment offers enterprise information management solutions for structured and unstructured data, IT management software, and security intelligence/risk man! agement s! olutions as software licenses, software-as-a-service, and hybrid or appliance deployment models.
On the positive side, Vertica and ArcSight are likely growing well off a small base while the company struggling with Autonomy, and OpenView would face growth challenges as it is tied to HP hardware installed base.
For HP's financing business, sale of financing receivables and operating leases could be used to pay down financing debt and hence will not generate any equity value. As of July 2013, net financing portfolio assets were about $12 billion while gross financing debt was about $11 billion.
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HP shares fell 18 percent since its last quarterly report. It trades about 6 times its 2014 consensus earnings estimate and traded between $11.35 and $27.78 during the past 52-weeks.
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