What Wall Street Is Watching Ahead Of The HP Split

In October 2014, Hewlett-Packard Company HPQ announced plans to split into two separate publicly traded companies by the end of 2015. Hewlett Packard will divide into HP, which will sell computers, and HP Enterprise, which will sell all software, storage, and cloud services.

The impending split has not slowed down the company, as HP started 2015 with a bang by releasing a slew of new products. HP expanded its selection of computer monitors and announced the new HP Pavilion Mini Desktop, HP Steam Mini Desktop, and HP ZBook 14 and 15u.

On January 6, analyst Kulbinder Garcha of Credit Suisse maintained an Outperform rating on HP and raised the price target from $45 to $50. Garcha reflected on several growth catalysts in the near term, noting, “Although our IT survey suggests that incumbents will continue to struggle from the impact of the cloud, our Enterprise revenue estimate of a 2.4% decline in FY15 adequately reflects this.”

The analyst concluded: “We have outlined a preliminary balance sheet and free cash flow post-split and conclude that of the $8 billion of free cash flow in fiscal year 2015, $4.4 billion is from HP Enterprise and $3.6 billion from HP Inc. We see a post-split scenario where HP Inc. could have an interesting capital return story by levering up with scope for $11 billion of cash return over the first three years.”

Kulbinder Garcha has a 51 percent overall success rate recommending stocks in the past year with a +2.6 percent average return per recommendation.

Separately on January 7, analyst Maynard Um of Wells Fargo reiterated an Outperform rating on HP with a price target range of $46 to $49, raised from his previous range of $39 to $41. Um lists the following reasons for raising the valuation: “1) fundamental – we expect FY15 to be a bottoming in a number of its legacy businesses, which we believe should lead to multiple expansions.”

Second, the analyst points to “the event – corporate split should unlock value and opportunity for further cost synergies.” And lastly, Um highlights “low multiple – at 9.9x our FY15 EPS, HPQ still lags the market and some of its megacap peers.”

The analyst concludes: “While HPQ faces many of the same risks (macro, geopolitical, etc) as its peers, we see HPQ as having lower multiple compression risk with a potential event catalyst and bottoming fundamentals that we believe should result in multiple expansion.”

Maynard Um has a 69 percent overall success rate recommending stocks from the past year with a +15.1 percent average return per recommendation.

On average, the top analyst consensus for HP on TipRanks is Moderate Buy.