Magazine article Modern Trader

Hpq - Hpe = +25%

Magazine article Modern Trader

Hpq - Hpe = +25%

Article excerpt

In early October 2014, Hewlett-Packard Co. (HPQ) announced a plan to split into two distinct, publicly-traded companies. The company expects the spin-off to occur by Nov. 1, 2015. The transaction is expected to be tax-free to shareholders of HPQ. The spin-off, named Hewlett Packard Enterprise Company (HPE), is expected to trade on NYSE under. HewlettPackard provides products, technologies, software, solutions and services to individual consumers, smalland medium-sized businesses and large enterprises.

HPE will consist of infrastructure, software and services businesses. The infrastructure business consists primarily of servers, storage arrays, networking equipHment and related services. HP Enterprise is the industry leader in x86 servers and maintains substantial market share in storage and switches. In fiscal year 2014, HP Enterprise generated net income of $1.6 billion from revenues of $55 billion.

HP Inc. (post-split) will include printing and personal systems, and HP is the leader in both markets, but we believe that PCs and printers are under increasing competitive and secular pressures. HP Inc. is less capital-intensive than the Enterprise business and, given a negative cash conversion cycle, should look appealing from free cash flow and ROIC metrics. Plus portions of HP Inc. benefit from a relatively steady annuity like revenue model. Following the spin, HP Inc. will continue to trade on the NYSE under the symbol "HPQ." We value the sum-of-the-parts for HPQ at $58.8 billion ($33) per share. HPQ's stock is currently trading at $26. …

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