Is the Hewlett-Packard Breakup a Bargain?

If you could buy just one of these two stocks, which one would it be: HP Inc. (NYSE: HPQ) or Hewlett Packard Enterprise Co. (NYSE: HPE)? Do you think the future will be about printer cartridges and personal computers (PCs) or consulting services and servers? Is one or the other of these companies a bargain?

Or maybe you think a smart investor should buy some of each. After all, maybe the recent separation of the venerable Silicon Valley company into two pieces is an opportunity to invest in the old company but with a more nuanced investment strategy. Say, 40% printers, 60% services. Let’s have a look.

HP trades for eight times projected earnings of $1.72 a share in the fiscal year ending in October 2016. That’s among the lowest valuations in the S&P 500. Hewlett Packard Enterprise’s multiple is roughly equal.

HP hasn’t announced its dividend yet, but at its September analyst day the printer company guided a dividend of around $0.48. That’s a yield of 3.4%, according to Barron’s. In a weekend article, the magazine had a lot of good things to say about HP and almost nothing to say about Hewlett Packard Enterprise.

Barclays’ analyst Mark Moskowitz agrees. Of the two companies he likes the printer business for its cash flow and prospective yields. There is no question that selling ink and toner is a high-margin business, yet it is declining (slowly), as are sales of PCs (not so slowly). But HP’s secret is its cash flow and the prospect of how much of that cash will be returned to investors. Moskowitz rates HP as Equal Weight and Hewlett Packard Enterprise as Underweight.

UBS analyst Steven Milunovich rated Hewlett Packard Enterprise a Buy and HP a Hold. Again, the low valuation is the most attractive feature. Hewlett Packard Enterprise, however, is playing in a sector that is expanding and, providing the new company can come up with a way to differentiate itself from IBM, Microsoft and Amazon Web Services, the new company has a good chance to be successful, and so do its investors.

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Whether either HP or Hewlett Packard Enterprise is a bargain depends largely on an investor’s goals. HP is very likely to treat investors better in the short- to medium-term, while Hewlett Packard Enterprise could be a medium- to longer-term winner. One investing strategy might be to treat the two equally, just as if the break-up never happened. In the immortal words of George Orwell, you pays your money and you takes your chances.