What the Hewlett-Packard Split Means for HPQ Stock

Investors put their stamp of approval today (Monday) on the announcement that Hewlett-Packard Co. (NYSE: HPQ) is finally splitting itself up into two companies, and for good reason.

HPQ stock was up about 6%, to $37.37, in mid-day trading. Hewlett-Packard stock is up more than 33% for the year.

"This HP deal is a smart move that's good for shareholders," said Money Morning Defense & Tech Specialist Michael Robinson. "CEO Meg Whitman recognizes that these two businesses are on divergent paths."

The idea is to spin off the legacy printer and PC business into a company called HP Inc., while the corporate hardware, cloud, and software businesses will become known as Hewlett-Packard Enterprise.

The spin-off will create two publicly traded companies of approximately equal size, with revenues for each of about $56 billion.

Whitman will be CEO of Hewlett-Packard Enterprise and will retain a role at HP Inc. as nonexecutive chairman. Dion Weisler, the current head of the company's printing business, will become CEO of HP Inc.

Such a split was unexpected from Whitman, who reversed plans for a similar strategy when she was named CEO of HP back in 2011. However, the company was in disarray back then and would probably have botched any spin-off.
HPQ stock
Now nearing the end of the third year of a five-year turnaround plan, Whitman told CNBC this morning that the time finally was right to split the Palo Alto, Calif.-based HP in two.

"Today is only possible because the turnaround has succeeded," Whitman said on the "Squawk on the Street" program. "We think this is the best tactic to continue this turnaround journey and position HP into two great new companies that are real scale and have a chance to make a real difference on a go-forward basis."

Current HP shareholders will receive shares in both companies on a tax-free basis at the time of the split, which the company said should be completed by the end of its fiscal year 2015 - just about one year from now.

But what about the prospects for these siblings? Is one a better investment than the other?

Two Versions of Hewlett-Packard Stock Are Better than One

Once the companies are separate, it seems obvious that Hewlett-Packard Enterprise will be the better stock to buy, as it will focus on the businesses that have not only higher growth potential, but higher profit margins.

"The action is in the enterprise, cloud computing, the Internet of Things, which needs all that back-end stuff," Robinson said referring to the servers, data storage equipment, and software-as-a-service (SaaS) that will form the backbone of the new Hewlett-Packard Enterprise.

This is also the company that will end up with several promising technologies, such as its Project Moonshot line of low-energy servers as well as a mostly ignored project called "The Machine" that would revolutionize the server industry by drastically shrinking the size of the server farms that cloud computing requires.

And since Whitman picked Hewlett-Packard Enterprise as the one she will run personally, it's clear which of the two she prefers.

No doubt, investors should keep their eye on Hewlett-Packard Enterprise.

So that leaves us with HP Inc. which looks like it will end up as the abandoned stepchild, the company saddled with the mature printing and PC businesses.

But HP Inc. could end up a better stock than people might think.

To some extent, Robinson said, HP Inc. will be about "cost control and margins - even though it's a highly mature market you can still make money on it."

Yet there's a wild card for HP Inc. that could deliver substantial growth and make the stock much more appealing - 3D printing.

Many have criticized HP for not aggressively introducing products into the still-nascent 3D printing market, but the company may not feel the technology is ready for prime time.

HP is known to be working on 3D printers, and has hinted it's close to announcing a product either this year or next. And according to the company press release, 3D printing will land with HP Inc.

While HP Inc. will be far from the first to market, it won't need to be. A superior product carrying the Hewlett-Packard brand - known for its quality printers - will instantly grab a big chunk of market share.

And it's a rapidly growing market. According to Canalys, the 3D printing market will grow from $2.5 billion in 2013 to $16.2 billion by 2018. Morgan Stanley analysts believe the 3D printing market could reach $21.3 billion by 2020.

That would transform HP Inc. from a boring legacy business into a high-tech growth business.

And one more thing: Either of the new companies, given their smaller size, could become a takeover target, which would add even more shareholder value.

Follow me on Twitter @DavidGZeiler.

UP NEXT: The HP spin-off comes hot on the heels of another major tech split, eBay's announcement last week that it plans to spin off its PayPal unit. But while speculation has run rampant as to who might buy PayPal, few are talking about this obvious suitor for eBay...

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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