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After the Split, What Will the Two New HPs Be Worth?

Suprise! HP is worth more in pieces than together.

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Now that it has confirmed its plans to split into two companies, what HP shareholders (and potential buyers) would like to know is: What are they worth split up?

More, but not that much more, according to Toni Sacconaghi, an analyst with Bernstein Research who has covered HP for years. He has long argued that a split of some kind was likely.

In a not-so-surprising note to clients this morning, Sacconaghi argues that a sum-of-the-parts analysis of HP is worth as much as $42 a share, or about $78 billion and change, versus the $66 billion market cap it posted on Friday before news of the split was revealed.

He writes that the strategic reasoning for the break-up is “not compelling,” but HP’s shares are among the cheapest tech stocks in the S&P 500, which means that the breakup could boost the share price: “Splitting the company into two and ascribing the multiples of its weakest competitors still leads to upside in the stock.”

Valuing HP was tough as several divisions are “challenged for growth and face heavy structural headwinds,” making the case that CEO Meg Whitman has made that this is a move to “unlock value” a formidable task.

Worse, he says, splitting the companies in two will get rid of about $1 billion worth of operational synergies. That’s not a made up number: When HP CEO Meg Whitman shelved a previously proposed spin-off of HP’s PC unit in 2011, she underpinned her argument with this very $1 billion in saved operational costs.

So here’s how Sacconaghi thinks HP’s valuation breaks down:

Personal Systems or PC Group: Expected to bring in $34.3 billion in revenue in 2014, if it were a standalone company, this group would sell for about $6.9 billion or about 0.2x sales or about $3.60 per share. For comparison he says PC companies like eMachines, Gateway and IBM’s PC division all sold at a similar valuation.

Imaging and Printing: Printing may be on the decline, but there’s still a lot of cash to be made by selling ink and printer supplies. Sacconaghi figures the printing unit will bring in about $23 billion in revenue and post an operating profit of about $3.9 billion in 2015. Assuming a ratio of between 9 and 11 times forward earnings, the printing unit is worth between $28.4 billion and $33.4 billion, he says, or between $15 and $17.60 a share. For comparison, he looks to the valuations of Xerox and Lexmark.

All in, the company that will be called HP Inc. will be worth about between $30 billion and $35 billion.

That brings us to HP Enterprise. The Enterprise hardware group, which sells servers, storage and networking equipment, plus the software group would together be worth between 7.4x and 9.8x forward earnings which yields a valuation range of between $28.2 billion and $37.7 billion. He compares it to the valuations of companies like Cisco Systems, Oracle, EMC and NetApp.

Then there’s the Enterprise Services business, a long troubled unit within HP. Sacconaghi pegs its value at a little below $15 billion, or about 0.7 times its estimated $22.5 billion in sales.

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