Hewlett-Packard recently completed a dramatic split of its core businesses into HP Inc. (NYSE:HPQ) and Hewlett-Packard Enterprise (NYSE:HPE). The first will continue to be responsible for printers, PCs, and other consumer products, while the latter specializes in servers, networks, and consulting.
But is this move enough to right the ship for the struggling tech giant(s)? At the moment, the market seems unimpressed with both stocks, but that doesn't mean they don't have some potential.
Listen to the full podcast by clicking here. A full transcript follows the video.
This podcast was recorded on Nov. 13, 2015.
Dylan Lewis: We're talking about beat-up tech stocks. There's one, it's been in this space for a while.
Sean O'Reilly: There's one that just comes to mind whenever I say "beat-up tech stock."
Lewis: We can talk about some of the, maybe the older tech companies like the large giant in this space. We're talking about Hewlett-Packard, of course. And so when we're talking about them, this is not the Hewlett-Packard of old. These are basically two separately run companies.
O'Reilly: Yeah, and actually we would not have been able to say that just 30 days ago. The board approved the split of Hewlett-Packard into Hewlett-Packard and Hewlett-Packard Enterprise on Oct. 1. The split took place in October, here we are on Nov. 13, and they've been publicly traded companies for less than, I don't know, three, four weeks each.
It's not been so hot. This is the one company where it's, they're beat up because of earnings, but not the specific quarter. Basically they split into two companies, and HP kept the PCs and the printer business -- that's a fast-growing industry right there -- and Enterprise. And both of them had terrible results last quarter.
So I dove into the last quarter's results when it was still part of the original HP, and I just wanted to see what each new company would be doing. So for HP, in my notes here I have "aging dinosaur." I'm being particularly cruel there, and I'm sorry to any of our HP employee listeners. PC sales fell in the second quarter 13% year over year to $7.5 billion, not great. That includes desktops and workstations, printer sales, which was for years HP's bread and butter.
I mean, that's the one business where you know you're going to get a quality printer. Those fell 9% year over year to $5.1 billion, and that's just because we're all switching to digital photos and documents online. So let me ask you, when was the last time you printed out a photo, Dylan?
Lewis: Oh, a photo? No, the only things I print out now are quarterly calls, and that's so I can read them on the metro.
O'Reilly: I have a 21-month-old son. I mean, we do it every three to six months for the annual photo shoots or whatever, and that's definitely going to dissipate as he ages. And then you shift to year to year. I mean, my son's life is on [Amazon.com] Cloud.
I'm on AWS; my son's whole life is on AWS. This is not good. The other business, which I'm slightly more bullish on, but even they didn't have great results before the split, HP Enterprise. I termed them "the minnow in the ocean" because they're their own company and they can focus more on R&D spending; they can really focus on the customers, and they don't have to worry about the PCs and the servers and everything. Not the servers, the printers.
They get to compete now with the coming juggernaut that is Dell/EMC, yay. They get to wake up every morning and get to compete with them.
Lewis: Yeah, it's going to be tough.
O'Reilly: Microsoft, Oracle, IBM, they're not slouches in this space, either. I mean, this is not going to be pleasant. So last quarter before the split, HP's Enterprise services revenue fell 11% year over year to just under $5 billion. IT hardware revenue inched up 2% because, just better demand for a couple of their servers, which is, full disclosure, I know nothing about servers. But the note said that it was their x86 servers.
So that revenue is $7 billion. Both companies are free cash flow-positive and they kind of know where they're at. They know full well that they need to just return cash to shareholders, because they probably can't compete with Dell/EMC or Oracle, or Microsoft or something. So both companies have committed to returning 50% to 75% of free cash flow back to shareholders every year in dividends and buybacks.
Lewis: Wow, that's a very shareholder-friendly policy.
O'Reilly: It is, but Wall Street doesn't care. I say that because both companies ... so whenever you do a spinoff, or a split or an acquisition or whatever, you need to tell investors what you think you're going to earn the next year. Both companies are trading post-split for about 8 times forward earnings from what they're expected to earn this year.
Lewis: That's not much.
O'Reilly: That is not a tech stock. That's not even a tobacco stock. That's like a "we don't think you're going to grow, and in fact we think you're going to shrink a little bit" evaluation.
Lewis: Yeah, that's crazy. So something that you see most of the time with spinoffs or with people kind of being smart about restructuring is they do it to kind of silo struggling business, right? It sounds to me like we have two silos of struggling businesses.
O'Reilly: It's the minnow in the ocean versus the aging dinosaur. If you had to pick one, the minnow could theoretically eat some plankton and then eat another small fish, and then actually grow. And if I had to pick one of these companies to bet on, I would pick Enterprise because they at least have a shot.
Lewis: You went really deep into that metaphor.
O'Reilly: Yeah, I mean, you know. I did that on the spot, too.
Lewis: That was good. So the Enterprise one is the one to watch.
O'Reilly: Yeah. Wall Street is modestly bullish. The few analysts that have taken a deep dive into this is, I don't want to call it speculative, but nobody really knows what's going to happen in this because all of these companies are black boxes. Do you know, what the heck, an enterprise company?
O'Reilly: You know what I mean? The analysts that have a decent amount of experience, I did see one note from Barclays. They think that earnings at the Enterprise segment will grow forward as far out as they can project, which is about three years. They think they can grow earnings over the next three years, so that's at least modestly bullish. But minnow in the ocean versus aging dinosaur.
Lewis: Yeah, neither of those are great prospects.
Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool owns shares of Microsoft and Oracle. The Motley Fool recommends Barclays. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.