HP’s Stock Catches Tailwind After Whitman Cancels PC Spin Off

Barely a month after being named CEO, Meg Whitman Thursday announced that Hewlett-Packard (NYSE:HPQ) would keep its PC division rather than selling it off, reversing a plan proposed by former Chief Executive Leo Apotheker who was fired in September after a boardroom row over his plans for the business. ^[1] When Meg Whitman announced she needed to do some “number crunching” to determine if HP should spin off its PC business, we had a strong suspicion that she would reverse this decision. So while not a total surprise, it does carry large implications for shareholders as well as competitors such as Dell (NASDAQ:DELL) and IBM (NYSE:IBM).

The press release mentioned that HP has completed its evaluation of strategic alternatives for its Personal Systems Group (PSG) and has decided the unit will remain part of the company. While the decision itself is not a big surprise as earlier reports indicated the costs to spin out the business would outweigh its benefits, such as its component-buying advantages, among other reasons. This also brings into question whether or not other decisions would be reversed such as HP’s tablet PCs and WebOS.

We currently have a $42 Trefis price estimate for HP which is significantly above the market price.

See our full analysis of HP.

HP is the Largest PC Manufacturer in the World

HP is by far the largest PC manufacturer in the world with $40.7 billion in revenues in fiscal year 2010. However, PC is a highly commodity business and the low margins have previously forced HP to contemplate a PC spin off. ^[2] As such while PCs make up one-third of HP’s annual revenues, the associated low margins make them a much less valuable division for the firm as compared to HP Services, Printing & Imaging Group and Enterprise Storage, Servers and Networking (ESSN) divisions.

We estimate that HP’s PSG business (comprising of Notebooks & Netbooks, Desktops, and Workstations & Others) is worth $12 billion making up nearly 14% of our $42 Trefis price for HP.

However, it is worth noting that while the PC business may not be the most valuable for the firm, it intricately derives a lot of value for HP’s other businesses, in particular for services and printing & imaging.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. HP to Keep PC Division, HP [↩]
2. H-P CEO starts to undo the damage, Marketwatch.com [↩]