H-P Shares Jump On Split News, 2014 Outlook Reiterated
Shares of Hewlett-Packard (HPQ) jumped 4.74% on Monday’s trade after the technology behemoth confirmed the separation of its PC and Printing business, and the corporate hardware and services business into two publicly listed companies. The entire process is expected to be completed by the end of fiscal 2015.
Post split, H-P’s PC and Printing business will operate under HP Inc. while the corporate hardware and services comprising computer servers, data storage devices, networking, software and services will operate under the name - Hewlett-Packard Enterprise.
Current CEO Meg Whitman will head the new Hewlett-Packard Enterprise while Dion Weisler, currently serving as the Executive Vice President of H-P's Printing and Personal Systems business, will preside as the CEO of HP Inc. Meg Whitman will also oversee operations of HP Inc. in the capacity of non-executive Chairman on HP Inc.'s board of directors.
The current separation of the units comes at an opportune moment for the company as it is seeing an uptick in its legacy PC business while its printing operations remain volatile. Moreover, the company would now be able to focus on the emerging 3D printing segment as well. The company had earlier hinted that it was looking for opportunistic investments in the 3D printing market.
Additionally, H-P’s position in the cloud, security and Big Data segments will be the growth catalysts, going forward. Adoption of H-P’s offerings in the server and storage market has also been strong over the past couple of years. Notably, the company maintained its leading position in the server market in the second quarter of 2014, per IDC’s Worldwide Quarterly Server Tracker. As a matter of fact, H-P expanded its market share to 25.4% from 25% in the year-ago period and revenues increased 4% on a year-over-year basis.
Thus, the split would enable a customized approach to two different kinds of businesses, which might not have been possible as a single entity.
Also, the separation of the businesses is a rational choice. Although the PC and printing segment contribute approximately 50% of H-P revenues and the rest come from Enterprise Group, Enterprise Services, Software and HP Financial Services, profits from the PC and printing business had been less than satisfactory over the last couple of years.
The company has been restructuring operations due to softening demand in the PC market. By the end of the third quarter, H-P’s workforce was slashed by 36,000 positions. H-P also increased its expected number of layoffs to 55,000 by fiscal 2015 (up from earlier 45000–50,000), ensuring a lean cost structure for the company.
Now despite the ongoing restructuring measures, the company reiterated its fiscal 2014 non-GAAP earnings guidance of $3.70 to $3.74 per share. On the other hand, the company’s fiscal 2015 earnings are expected to be higher ($3.83 to $4.03 per share) despite the fact that the business will be splitting at the end of the fiscal.
We believe H-P’s growing focus on new business segments, such as electronic medical records, cloud computing and the analytics segment will help it to grow in the ensuing quarters. However, a weak PC market and sluggish macroeconomic environment remain headwinds. Also, H-P’s enterprise segment will now compete directly with International Business Machines (IBM), Cisco (CSCO) and Oracle (ORCL), which means that a lot still depends on execution.
Currently, H-P has a Zacks Rank #2 (Buy).
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