Just a few weeks ago Ebay spun-off it's PayPal business in a very smart and soon to be lucrative way, simply based on the cash generation PayPal has produced and will continue to produce in the near future as a leader, though competing with Apple and newcomer Square, in the online payments space. Hewlett-Packard (or HP), like Ebay and Symantec, is joining the spin-off party. Quietly, shrewdly, and yet mostly unmentioned has been HP's stock rise since Meg Whitman took the company over in 2011. In the 3 years since, HP has risen 50% and trading over $30 a pop. Despite the fact that Lenovo and Dell have badly overtaken HP's command of the PC sales market. The current spin-off would allow HP Inc., which includes the PC and printing business, to be separate from HP enterprise services, which includes servers, networking and storage.
The enterprise division will have ample competitors including Oracle, IBM, EMC and Cisco. From a strategic standpoint, this split has validation. HP Inc. has a consumer centered focus with tangible items being sold vs HP enterprise which is completely corporate and software focused. The two businesses are clearly different and target totally different sets of personnel. The strategic differences outline an important point in support of activist investors who, at least of late, have been strong advocates for spin-offs. One CEO overseeing two vastly different profit generating entities is a tall task. According to tech researcher Crawford Del Prete, HP Labs will be part of HP enterprise and will hopefully drive HP's innovation going forward.
What will drive HP Inc.'s profit will be a harder question to solve since three quarters of their operating profit comes from print, not PC. At this point, investing in R&D or developing new PC products seems desperate and illogical when looking at the likes of Dell, Microsoft, and Apple.
There's reason to be skeptical based on their earnings report from August, as well. Stagnant third quarter revenue growth of $27.1 billion was right in line with analysts predictions. And with 50,000 layoffs expected by the end of the year (nearly 18,000 have already been laid off), their is room for skepticism with regards to HP from both a corporate governance and financial ascendancy perspective. The biggest room for growth does come from the enterprise side where the market potential, at least for HP, in innovation for servers, networking, and software services is much greater than that of PC or print. If you want an Ebay analogy, it's that the HP enterprise company could become the profit generating machine that PayPal is now. Though not nearly to the extent of PayPal. The ultimate assessment of HP's spin-off will come a year to two years down the line after each business entity's management has invested enough time and money to the appropriate places. For shareholders in the meantime, there are surely more dividends to come. And for stingy investors infatuated with low P/E stocks, HP is right up your alley. Until then though, this is just a spin-off. But one that makes perfect sense.
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