Facebook
Twitter
After months of preparation, HP Inc. (NYSE: HPQ) and Hewlett Packard Enterprise Co. (NYSE: HPE) have finally split. Formerly known as a single entity, Hewlett-Packard Co., the company has separated its flagship PC and printers businesses from its strategic growth areas like servers and storage devices. The stocks now trade under different ticker symbols, with different business models and CEOs.
The HP split has been one of the most high-profile announcements in the past year, although fundamentally, not much has changed now that HP Inc. and Hewlett Packard Enterprise are independent of each other.
Managerial Strategy: Better Apart Than Together
Going forward, HP Inc. will focus on printers and personal computers, while Hewlett Packard Enterprise will manage the higher-growth servers, storage devices and services units. The rationale for the split is that HP believes its employees and financial resources can now be better utilized on a smaller and narrower group of businesses.
The hope is that the two separate companies are leaner, more efficient and more productive than before. In September, the former Hewlett-Packard announced 25,000-30,000 layoffs, primarily in enterprise services.
Still, the problems that the previous company had will remain. In the last quarterly earnings report for the consolidated company, revenue declined 8% year-over-year, while diluted earnings per share fell 10%. The company’s personal systems division, which housed its PC operations, suffered a 13% decline in revenue. Separately, revenue from printers fell 9% for the quarter.
According to technology market research firm IDC, worldwide PC shipments fell 10.8% in the third quarter, which was even worse than the 9.2% decline analysts had expected. The firm calculated that HP saw shipments decline 5.5% year-over-year.
There were a number of reasons for this. First, after the release of Microsoft’s (NASDAQ: MSFT) new Windows 10 operating system, consumers decided to simply upgrade to the new software instead of purchasing new computers. In addition, the PC industry more broadly is facing severe competition from smartphones and tablets, which are increasingly being used for personal computing at both the consumer and enterprise levels.
For this reason, investors should not get too ahead of themselves after the HP split. Breaking up the company into two parts does not change the equation. It simply moved the pieces around. The company is still facing a structural problem which is now squarely on the HP Inc. side, which is that sales of PCs and printers are stuck in a steep decline.
Hewlett Packard Enterprise Is the Stock Worth Owning
It is very interesting to see the market’s reaction to the split. On the first trading day since the split, HP Inc. stock jumped 13%, while Hewlett Packard Enterprise fell 1.6%. The two companies ended the day with very similar market capitalizations.
Despite the initial market trading, of the two newly-formed entities Hewlett Packard Enterprise appears to be the better bet for investors going forward. The reason is fairly straightforward: Hewlett Packard Enterprise is where the future growth will be.
In the aftermath of the HP split, Meg Whitman, CEO of the former Hewlett-Packard Co. and now of Hewlett Packard Enterprise, stated in an interview on CNBC that Hewlett Packard Enterprise will realize constant-currency revenue growth in 2016. One plausible scenario would be that Hewlett Packard Enterprise could be an attractive takeover candidate, now that it is free from the shackles of the lumbering giant HP Inc.
The same cannot be said for HP Inc. Revenue is likely to continue declining as people simply are not buying as many printers and PCs as they used to. As a result, all the positive catalysts seem to be with Hewlett Packard Enterprise, which is why that stock should be the clear favorite for investors.
Stocks split from their parent companies can be extremely lucrative, and many are now crushing the Dow and S&P 500 by wide margins. Find out why right here.