Hewlett-Packard Stock Split Doesn’t Make Sense for Investors

Update: Hewlett-Packard is selling its 51% stake in a China data-networking operation for about $2.3 billion, The Wall Street Journal reported Thursday. This article, written earlier in the week, explains why the move makes sense and looks ahead to the company's second-quarter earnings report after the bell on Thursday.  

NEW YORK (RealMoney) -- The past 10 years have been a roller coaster for Hewlett-Packard (HPQ) shareholders, with the stock as high as $53 and as low as $12.

Company management has tried every trick in the book to get the shares to go higher. Years ago, they doubled down on the PC business hoping to dominate in that area.

Now, however, Hewlett-Packard is spinning out the PC business because it has turned into a giant albatross. The company bought back massive amounts of stock, created all sorts of one-time gains and laid off thousands of employees, to no avail.

Investing in the stock over the past 10 years has been like shooting the rapids: You never know when you are going over the falls.

In February, I was very critical of Hewlett-Packard bulls who were simply buying the stock because of the company split or stock buybacks. Fortunately, I was right.

After my article, the stock tumbled to about $31 from $38. But now the shares are clawing their way back as investors anticipate the big break-up.

Hewlett-Packard reports its fiscal second-quarter results on Thursday. Even though the quarter won't have much impact on the stock, I thought I would take a look at it anyway.

For the April quarter, investors are expecting revenue of $25.6 billion, down 6.16%. About two-thirds of its revenue comes from overseas, so currency is going to be a big factor in whether the company will be able to meet expectations.

Earnings per share are pegged at 85 cents.

Preliminary data indicate the worldwide PC business continues to be a mess, according to research firm IDC.

For the first quarter this year, IDC estimates that 68.5 million PCs were sold worldwide, which is down 6.7% year over year.

The PC market has seen declines for the past eight quarters. The big problem, however, is that the declines are getting worse every quarter (in the first quarter last year, the PC market declined just 0.5%).

During the first quarter, Hewlett-Packard gained 180 basis points of market share and remained the top PC vendor in the world. The rest of the top PC makers lost share.

The company remains on track to split Nov. 1. Wall Street thinks that the split will create tremendous cost savings and allow both companies to better focus on their respective markets, but I don't believe it.

From an investor relations meeting I attended in Boston, the company thinks it will see a $1.55 billion improvement in cash flow in fiscal 2016. You have to wonder if the break-up is a good idea, as it is estimated to cost more than $4 billion.

To hit management's long-term targets, the company needs to find an additional $6.5 billion to $7 billion of cost savings by fiscal 2019. That is a pretty tall order, and for those who work for Hewlett-Packard, that can't be comforting.

I also got the impression that though the foreign currency hit won't be as bad as many expect, management has been blindsided by the steep drop-off in the PC business. I had the strange feeling that Wall Street estimates are too high, and it is almost certain the company will miss the quarter.

In my opinion, there are easier ways to make money in the stock market than to buy Hewlett-Packard. I know how these splits work.

Wall Street loves these deals; it can hype two stocks instead of one. Investors fall for this stuff all the time.

The PC business is collapsing in front of us, and now Wall Street wants to sell us shares to the front row. No thanks.

The company is expected to publish three years of back-dated financial statements for the two companies by early July. (What a thankless task that must be!)

I expect management to be out at all the institutional investor conferences in early September talking up the big split. I won't be attending those meetings.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

  Christ Laudani is the founder and president of ShortIdeas.com, a short-only equity research firm.

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