When the split with HP (HPQ -3.12%) was finalized in November last year, the primary objectives of the new HP Enterprise (HPE -1.77%) and its former partner were to pare overhead and become more adaptable to the ever-changing tech industry. Less than a year into the parting of ways with HP, CEO Meg Whitman has HP Enterprise heading in the right direction, and more changes are afoot.
For some investors and industry pundits, change can be worrisome. With change often comes uncertainty, and that translates to some folks waiting to see how things unfold. That appears to be the case with HP Enterprise, given its consensus price target of just $24 a share and what amounts to a hold recommendation. This makes HP Enterprise one of the cheapest stocks in tech.
One of the first significant moves Whitman made after HP Enterprise became a stand-alone tech services provider was inking a deal with Computer Sciences Corp. (CSC) to spin off and then merge its struggling enterprise services group creating a "new $26 billion pure play in global IT services."
Not only does the spinoff merger with CSC rid HP Enterprise of a money-losing unit, but even after accounting for divestiture costs and currency, the move will boost its overall margins, too. The enterprise services unit's 8.3% operating margin is by far the lowest of any HP Enterprise unit. By comparison, the enterprise group and software margins were 12.6% and 17.8%, respectively.
The deal with CSC will also create an estimated $1 billion in savings in year one, and climb to $1.5 billion annually going forward. The combined global tech services leader will instantly become a global powerhouse, and there's the not-so-small matter of HP Enterprise shareholders owning approximately 50% of the new combined entity.
HP Enterprise expects the deal will deliver $8.5 billion in after-tax value to its shareholders, which will include approximately a $4.5 billion stake in the "new" company, a $1.5 billion dividend payout, and shaving $2.5 billion of debt off the HP Enterprise books.
Once is good, twice is better
The CSC arrangement will unlock a great deal of value for shareholders when it closes around March next year, both in a new stock and an even leaner HP Enterprise. And just a week ago HP Enterprise announced a similar spinoff-and-merger deal for its software unit with U.K.-based Micro Focus (MCFU.F).
Unlike the CSC arrangement, HP Enterprise said it will spin off only its "non-core" software assets in the Micro Focus transaction, which is valued at $8.8 billion. HP Enterprise shareholders won't be left holding the software bag, by any means. In fact, following the closing of the deal, which is expected in March next year, HP Enterprise shareholders will own 50.1% of Micro Focus -- a stake valued at an estimated $6.3 billion. HP Enterprise will also receive a $2.5 billion cash payment upon closing.
Once the smoke clears
Already HP Enterprise runs its business more efficiently than before the split with HP. Even adding back in a $2.17 billion gain for the divestiture of H3C in fiscal Q3 2016, HP Enterprise shaved about $1 billion in overhead compared to the year-ago period. And the cost savings will continue climbing when the reinvented HP Enterprise finally comes to fruition.
What's left for shareholders after HP Enterprise's spinoffs? A $28 billion business with a laserlike focus on cloud, the Internet of Things, software-defined servers, networking, and data storage markets. Oh, and a 50% stake in one of the world's largest tech service providers, and 50.1% ownership of a global Infrastructure-as-a-Service (IaaS) leader. After all, IaaS is a market expected to grow over 38% this year, and that's just in the cloud.
All of that and HP Enterprise is trading at a mere eight times trailing earnings? For all those reasons, HP Enterprise belongs near the top of any list of cheap tech stocks.