Does Coming Split Into HP Inc & HP Enterprise Justify Holding Stock?
Financial Snapshot: HPQ ($38.19)
A) Rev/EPS forecast – Revs $27.3bn (-3% y/y), EPS $0.91 (+1% y/y)
B) Valuation: P/E 9.7x FY15 (Oct) EPS (1.9x PEG ratio), shows HPQ pricing-in gains from Windows 2003 server upgrade cycle.
HPQ – FY15Q1 Revenues Reflect FX Hit From International Exposure, Slowing PC Upgrade Cycle Benefits & Market Share Gains:With HPQ generating 65% of its revenues from outside the U.S. (highest exposures are EUR, GBP, RMB, JPY), current quarter revenues will be affected by US$ appreciation. Of HPQ segments, Personal Systems (32% of total revenues) are most exposed as PCs are priced in local currency terms. One FX benefit for HPQ will be in Printers (20% of total revenues) where toner and printing component supplies have significant sourcing from Japan. Away from FX considerations, HPQ gained market share during CY14Q4 (18.8%, +240bp share gain year/year) as MSFT’s WindowsXP support phase-out supported a PC upgrade cycle. However, note that the early read on CY15Q1 is not as positive given STX missing revenue guidance (due to near-term weak PC market, soft Europe results & FX impact) and INTC offering below-consensus guidance.
HPQ – Investors Already Discounting Windows 2003 Server Upgrade Cycle & Coming Company Break-up: While the PC upgrade cycle is now fading, investors are looking forward to MSFT Windows 2003 support phase-out to bolster HPQ server demand. However, note that with IBM having divested its x86 server operations to Lenovo, quite possible HPQ will experience greater price competition such that this year’s product upgrade cycle is not as beneficial as that in PCs. Meanwhile, the larger development capturing investor attention that may serve to limit further HPQ share price appreciation is the break-up of the company’s operations expected on or before the end of FY15 in October. Factors of possible concern to investors are: 1) the level of increased costs from operating the segments separately, 2) the working capital needs and capital structures of both businesses, and 3) the M&A outlook for the enterprise business. Presently, HPQ shares trade at almost 2x its EPS growth rate, so to our view investors are already pricing in the Windows 2003 server upgrade cycle as well as the partial closure of the conglomerate discount for HPQ.