HP: Sum of the Parts Analysis Suggests over $50/Shr Value

A recent Wall Street Journal article talked about Hewlett-Packard Co. (NYSE:HPQ) potentially splitting up.

In this scenario, a sum of the parts (SOTP) analysis by RBC Capital Markets says HP is trading materially below its SOTP price of $52 to $55 a share.

The exercise gives us further comfort in our Outperform rating given HP is trading materially below the SOTP analysis that suggests $52-55/shr. To the extent HP can get back to meeting expectations, and investors get comfort that the management team has a grasp of problems, the stock should trade closer to our SOTP price, analyst Amit Daryanani wrote in a note to clients.

Daryanani says the splitting up is highly unlikely.

Let's take a look how the various divisions of HP is currently faring.

Personal Systems Group (PSG): HP remains the leader in PC markets, though it has struggled due to emergence of tablets. In FY10, this segment generated over $40 billion in revenues and operating margins of 5 percent.

Above all, PSG also contains the WebOS assets, which is HP's foray into smartphones and tablets.

We value the PSG division based on traditional PC peers to be about $10 billion (est. $3/shr), Daryanani said

Enterprise Servers, Storage & Networking (ESSN): This segment contains HP's server business, where they maintain the top global position. In addition, the segment consists of HP's growing and higher margin storage and networking businesses.

We peg the value of the ESSN division based on enterprise focused peers to be approximately $51 billion (est. $26/shr), the analyst said.

Imaging & Printing Group (IPG): The IPG segment consists of HP's commercial and consumer printer hardware coupled with the supplies business. This has long been the crown jewel of HP given high margins and attractive cash generation.

Daryanani pegs the value of the IPG based on a basket of domestic and international printer companies to be approximately $18 billion (est. $8/shr).

Services: HP has the second largest market share in services, a product of the EDS acquisition. The segment has come under pressure due to underinvestment over the last few years.

We use a broad basket of service companies to peg fair value around $25 billion (est. $11/shr). If one were to select a depressed multiple like CSC, then we estimate the value of services to be $15 billion, or an estimated $6/shr, the analyst wrote.

Software: This is the smallest part of HP's portfolio, generating $3 billion in fiscal 2010 revenues and 29 percent operating margins in fiscal 2010. Using a broad basket of software comps, the analyst values the segment at about $9 billion (est. $4/shr).

Shares of HP were down 1.26 percent at $35.99 on the New York Stock Exchange.