Has the Split Worked for HP & Hewlett Packard Enterprise?

It has been over a year since HP Inc. HPQ and Hewlett Packard Enterprise Company HPE split into two separate entities. Hence, this may be a good time to analyze whether the split has helped these two companies to post a turnaround.

The split took effect on Nov 2, 2015, which led to the creation of two companies namely HP, which focuses on the consumer-facing computer and printer business and HPE, which focuses on the enterprise-facing hardware and cloud business.

Since the split, the two entities have made it clear that they will focus on restructuring and realigning their businesses to drive long-term sustainable growth and improve margins. In keeping with this effort, the two companies have made a series of restructuring initiatives, which includes trimming down businesses, lowering costs through job cuts and making some strategic acquisitions.

Here’s a recap of the turnaround efforts undertaken by both the companies since Nov 2015.

HP’s Turnaround Efforts

Post the split, HP adopted a strategy of focusing on product innovation and differentiation as well as on enhancing the capabilities of its printing business, which will help stabilize the top line.

Over the past one year, the company has launched various new models under its PC product lines of EliteBook, Spectre and Pavilion Wave. The impact of these launches was reflected clearly in the company’s last two earnings releases, wherein the Personal Systems segment witnessed stabilization to a certain extent, and even recorded a slight year-over-year improvement after several quarters. Keeping the trend alive, at CES 2017, HP announced Spectre 13 – the thinnest and most powerful iteration of laptops – that are anticipated to enhance the web experience and provide high-quality visuals.

The company’s efforts to revamp the printing business have also been commendable. Note that HP signed a deal to acquire Samsung Electronics’ printer business last year for a purchase price of $1.05 billion. The acquisition is a strategic fit for HP as it will expand the company’s printing business, with the addition of 6,500-plus printing patents owned by Samsung.

In addition, the company is now focusing on enhancing its 3D printing business capabilities. However, unlike 3D Systems DDD and Stratasys SSYS, which target all kinds of consumers, HP is emphasizing only on industrial markets because of their ability to afford a premium range of 3D printing solutions. It should be noted that even though HP has been operating in this space for almost five years now, it still lags behind 3D Systems and Stratasys.

On the cost front too, HP has taken commendable steps, which includes divestment of its content management software tools and Customer Communications Management (CCM) assets to Open Text Corporation and elimination of 3,000 to 4,000 jobs.

Per the company, the divestment of CCM will lead to cost reduction and enhance productivity, thus helping the company to boost profitability. The job cuts are anticipated to generate annualized cost savings of approximately $200 million to $300 million from fiscal 2020 onward.

HPE is Not Far Behind

Over the last one year, HPE has undergone massive restructuring too. The company, in 2016, decided to spin-off its Software and IT Services businesses and entered into deals to merge these with Micro Focus International Plc and Computer Sciences Corporation CSC, respectively.  

In our opinion, by trimming its size, the company intends to focus more on fast growing and high margin businesses such as high performance computing (HPC), private cloud, all-flash arrays and hyper-converged computing.

This is also evident from the fact that HPE has bought Silicon Graphics in Nov 2016, which provides HPC services such as servers, storage, and data center solutions to clients in the cloud computing, oil & gas, e-commerce, social networking, and other industries.

Furthermore, to lower its costs, HPE announced layoffs in Oct 2016.

Bottom Line

We believe that the split has allowed a customized approach to two different businesses, which may not have been possible while they operated as a single entity. Although, the independent entities are still struggling to determine their true business focus, we opine that their turnaround strategies are in the right direction.

This is evident from the last four quarterly reports of the two companies. It should be noted that in all the quarters of fiscal 2016, earnings of HP and HPE have either met or surpassed the Zacks Consensus Estimate.

Investors have also appreciated the initiatives undertaken by both the companies, as reflected from the share price appreciation in the last one year period.

In the said period, shares of HP gained 46.1%, outperforming the Zacks categorized Computer-Mini industry’s gain of 23.7%

During the same time frame, shares of HPE gained 82.9%, outperforming the Zacks categorized Computer-Integrated Systems industry’s gain of 40.9%.

Stocks showing momentum and having enough prospects are the ones that investors like to add to their portfolio. In our opinion, HP and HPE are such stocks which have gained solid momentum in the last one year and seem to have potential for further growth.

On the valuation front, the stocks look attractive as both have low P/E ratio when compared with their respective industry averages. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings. Therefore, lower the P/E of a stock, the better for a value investor.

Considering the companies’ strong fundamentals along with impressive P/E ratio and Zacks VGM Style Scores of “A”, we believe that the stocks are worth retaining in one’s portfolio. Currently both the stocks carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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HP Inc. (HPQ): Free Stock Analysis Report
 
Computer Sciences Corporation (CSC): Free Stock Analysis Report
 
Stratasys, Ltd. (SSYS): Free Stock Analysis Report
 
3D Systems Corporation (DDD): Free Stock Analysis Report
 
Hewlett Packard Enterprise Company (HPE): Free Stock Analysis Report
 
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