Why This Analyst Sees Hewlett-Packard Worth $43 — or Even $50

Argus reiterated a Buy rating for HP with a price target of $43. However, based on underlying trends, Argus continues to see fair value in the HP stock nearing $50. The sum-of-the-parts analysis suggests a slightly higher value that may be unlocked by decoupling the Personal Systems Group (PSG) from Enterprise.

The $43 Argus price target implies an upside of 34% from the current price. The official highest price target from analysts is $45, which implies upside of 40%.

Argus still believes that HP is attractively valued in its current incarnation. Furthermore, it believes that splitting the company in two will unlock value.

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The discounted free cash flow model from Argus points to a value exceeding $65, also in an accelerating rising trend. Argus’s blended value on HP exceeds $49. Appreciation to the 12-month target price of $43 implies a risk-adjusted total return, including the 1.8% dividend yield, in excess of the firm’s forecast total return for the S&P 500.

Note that, HP plans to split into two companies: Hewlett-Packard, including Enterprise Group, Enterprise Services and Software, and HP Inc., including PSG and Printing. Argus believes it is important for all or most of HP’s businesses to be functioning optimally or at least well as the company approaches the separation, which is expected to take place before the end of calendar 2015 and potentially before the end of fiscal 2015 in October 2015.

Hewlett-Packard grew its PC shipments in calendar first quarter of 2015 within a shrinking market, allowing HP to grow its market share substantially. The report said:

For both PSG and Printing, representing the assets of the soon-to-be-divested HP Inc., we are modeling a full-year revenue decline of 3%, to $55.8 billion. In the near-term, the Enterprise portions of H-P that will become the new Hewlett-Packard face more significant challenges. If the two companies had been split for all of fiscal 2015, we are modeling that the Enterprise based Hewlett-Packard would face a 7% sales decline, to $50.4 billion. At the same time, the Enterprise facing assets in the new Hewlett-Packard have inherently more earnings power and face less structural erosion. Assuming the two companies were split for the entirety of fiscal 2015, we estimate that the Enterprise company would grow operating income by 9%, to $6.5 billion; and it would generate an operating margin of 12.9%, compared with a hypothetical 11.0% for Fiscal Year 2014.

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Currency is currently a big headwind for HP, although a sizable amount of PSG sales are into North American enterprise. Argus believes already strong consumer spending continued to accelerate in April 2015, whereas April 2014 was a hangover month following the consumer retreat in calendar first quarter of 2014.

Shares of HP were relatively flat at $32.11 on Monday morning. The stock has a consensus analyst price target of $40.40 and a 52-week trading range of $31.00 to $41.10.