24/7 Wall St.

Forget about the old Hewlett-Packard Co. (NYSE: HPQ). Sure the former Dow Jones Industrial Average component’s stock is still officially trading ahead of its break-up, but the reality is that the “when issued” shares of the break-up companies have finally arrived. Now you have Hewlett Packard Enterprise Co. (NYSE: HPE-WI) and HP Inc. (NYSE: HPQ-WI) formally trading, with at least a little confusion prevailing over how these should be evaluated and viewed. 24/7 Wall St. has included a Wells Fargo analyst report as the bullish view here, because its valuation range is close to the most bullish price target for HP today, with an Outperform rating, and it has provided valuations on the when-issued shares.

HP’s separation is expected to be completed on November 1, 2015. That means that the when-issued shares will continue to trade until that date.

The HPQ-WI shares were last seen up 2.8% at $12.35, with a million shares having traded hands as of 11:00 a.m. Eastern Time. HP Inc.’s technology portfolio spans printing, personal systems, software, services and IT infrastructure. The HPE-WI shares were last seen up 0.9% at $16.70, as of 11:19 a.m. ET. Hewlett Packard Enterprise’s portfolio spans the cloud to the data center to workplace applications, with technology and services.

The real Hewlett-Packard shares, which are still trading, were last seen down 0.6% at $28.80 as of 11:19 a.m. ET. Its 52-week range is $24.30 to $41.10, and the soon-to-be-going-going-gone analyst consensus price target is $35.54.

The Wells Fargo report again comes with an Outperform rating and with a valuation range of $40.00 to $43.00. That range is based on a price-to-earnings (P/E) multiple of 11.0 times its fiscal 2016 earnings per share estimate of $3.72. Wells Fargo’s Maynard Um did warn that HP faces several risks. These include company-specific execution issues, more intense competition, currency headwinds, the overall macro economy and others.

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Um believes that a normalized free cash flow yield is attractive here. His explanation of the when-issued shares and some additional data was as follows:

The respective share prices for HPE and HPI (HP Inc.) result in P/E’s of 8.7x and 7.2x, respectively, and normalized FCF yields of 12.1% and 13.7%, which we think are attractive. Investors seem to struggle with why the split creates value as the dis-synergies appear to the contrary. We continue to believe there should be opportunities, particularly at HPE, to improve FCF and with management’s cash compensation expected to be predicated, in part, on free cash flow, expect there to be a renewed focus. Additionally, we believe any disruption at Dell caused by its acquisition of EMC should benefit HPE and HPI.

HPE-W trading level suggests the company is undervalued relative to its peers. HPE-W is trading at around $17 per share, which equates to a P/E multiple of about 8.7x based on our FY16 EPS of $1.90 (guidance of $1.85-$1.95). At $16.55, HPE’s normalized FCF yield is 12.1%. On a sum of the parts basis, assuming 10.0x for Enterprise Group (peer multiple: 11.6x), 12.0x for Enterprise Services (15.2x), 10.0x for Software (13.7x), and 8.0x for Financial Services, yields a $20 per share value. We expect revenue stabilization, margin improvement and free cash flow growth to result in multiple expansion. We note the company has had strong track record with respect to meeting its earnings target and do not see much risk of the company doing a transformational acquisition.

HPQ-W is trading at around $12 per share, which equates to a P/E multiple
of 7.2x based on our FY16 EPS of $1.72 (guidance of $1.67-$1.77). A $12.41, HPI’s normalized free cash flow yield is 13.7%. On a sum of the parts basis, assuming a conservative 8.0x for PCs (peer multiple: 13.1x) and 8.0x for Printing (8.8x), we derive a $14 value. While we expect secular trends in PCs and printers, currency, global GDP, etc. to continue to weigh, we believe the company is taking the necessary steps to position itself for growth and/or margin improvement and would not rule out accretive acquisitions either (content management platform, for example). In PCs, we continue to believe market demand will continue to consolidate benefitting top vendors (Dell, HP and Lenovo) and see issues such a price increases due to currency abating. In the printing segment, we expect HP to capitalize on the opportunities in the Graphics segment, focus on placing higher value printer units and push more ink in the enterprise.

As far as the rest of how to view Hewlett-Packard today, versus HP Inc. and Hewlett Packard Enterprise, this will all play itself out over the coming two weeks and in the weeks thereafter.

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