HP stock sell-off looks like overkill

August 19, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The selloff in Hewlett-Packard shares looks like overkill. The tech giant has seen about a quarter of its market value — or almost $16 billion — vaporized in two days. Shareholders have fled following another profit warning, a pricey deal to buy data search group Autonomy for around $10 billion, and a strategic U-turn. That makes for plenty of warts — but HP now looks too cheap.

Spinning off the PC division, as the company said it may do, would rid it of a headache. The growth of tablets and mobile devices are hurting traditional computer sales. But separating the two could take up to 18 months, and some antsy customers could flee. Rival Dell is valued at about 0.3 times last years’ sales. Attach a 25 percent discount to be conservative, and HP’s PC operations would be worth about $10 billion.

The rest of HP should earn around $12 billion in operating profit next year. But about three-quarters of that will come from services and printing. These businesses are steady and somewhat shielded from the economy’s travails. Strip the PC business valuation out of HP’s enterprise value on Friday of around $58 billion, and they are now being valued at about four times estimated operating profit. In contrast, IBM’s equivalent multiple is about 10 times. IBM’s consistency deserves a premium, but this gap looks excessive.

One additional risk for HP shareholders is that the company pursues more costly acquisitions. Newish boss Leo Apotheker believes his predecessors underinvested and that the firm needs to get its hands on more software. But any ideas of overpaying on future deals may be held back by the huge drop in the company’s value following the announcement of the Autonomy purchase.

Another danger is that the turnaround effort, which will take time, hits tricky spots and brings more profit warnings. But at the current HP valuation, there’s plenty of cushion against that. And there could be some quick wins, too. The price of patents covering mobile devices has rocketed over the past six months. HP bought a boatload of the most valuable ones when it acquired Palm for $1.2 billion last year. If the firm decides to sell this intellectual property, it could give shareholders an early reason to be glad they stuck around.

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