LOS ANGELES – The board of Hewlett-Packard Co. (HPQ) ousted Chairman and Chief Executive Carly Fiorina (search) Wednesday, drawing cheers from some investors who say the company's parts are worth more than the sum.
HP recently combined the printing and PC businesses, but investors have focused on four main divisions — personal computers, printers, enterprise, and services.
Following is an analysis of the performance of the four main parts and what they might be worth separately.
Imaging and printing, considered the company's crown jewel, accounted for $24.2 billion of revenue in fiscal 2004, second only to the PC business. But with operating earnings of $3.85 billion, printing profit was more than three times that of the next-closest unit.
"We think the printer business is worth $20-$22 (a share), and you really get the balance of the company for free," said David Katz, chief investment officer at Matrix Asset Advisors. His firm was among the shareholders that opposed the company's 2002 merger with Compaq Computer.
Bear Stearns analyst Andy Neff, in a midday note downgrading HP shares, suggested the printer unit had a breakup value of $15 to $18 a share.
Fiorina pursued an aggressive strategy in digital photography and photo printing, in many ways putting pictures at the heart of the company's consumer strategy, and the company is in the top ranks of both markets.
The Personal Systems Group, HP's PC unit, was its biggest revenue generator in fiscal 2004 at $24.62 billion, but it earned just $210 million, for a profit margin of less than 1 percent of sales.
Sanford Bernstein analyst Toni Sacconaghi, in a research note last November with a sum-of-the-parts valuation, suggested the PC unit reflected less than $1 of HP's share price.
Like its rivals, HP, the No. 2 PC maker, faces profit margin pressure from the proliferation of high-quality, low-cost desktop PCs. The central criticism of Fiorina during her tenure at HP was the acquisition of Compaq Computer, a deal many investors thought diluted the value of HP's imaging unit.
HP said in January it would merge the PC business with the printer unit, a move some thought presaged a breakup and others thought made a split less likely.
The enterprise storage and servers unit, essentially HP's high-end hardware unit, generated $15.15 billion in revenue in the year ended October 2004 and $173 million in operating earnings.
The company blamed problems in its fiscal third quarter last year on mismanagement at the unit, and it accelerated costs cuts in the unit once planned for fiscal 2006 into fiscal 2005.
That shortfall renewed complaints from analysts and investors that HP was an inconsistent company, delivering good results one quarter and disappointing in the next.
"I want to see them deliver on guidance and continue to make improvements in their enterprise business. They can't keep slipping up in other businesses," Shawn Campbell, principal of the HP-holding Campbell Asset Management, said in an interview last month.
The services unit represented $13.78 billion in revenue in fiscal 2004 and $1.26 billion in operating earnings. The "services" label is actually a wide umbrella covering technology services, consulting and integration, as well as outsourcing.
Analysts say HP has been gaining ground in the services market as shrinking deal sizes and terms put pressure on traditional services heavyweights like IBM.
Bear Stearns' Neff suggested that the PC, enterprise and services units together hold a breakup value of $6 to $7 per share.
Merrill Lynch analyst Steven Milunovich, in a note Wednesday, said the printer business had an implied value of $19 to $20 a share. Combined with HP's cash pile, which amounts to $2 per share, that roughly equals the current stock price. The other units were reflected in his $28 price target.
Others shied away from such a calculation.
"What is left is a very challenged portfolio of businesses," said Rod Bare, HP analyst at investment research firm Morningstar Inc. "The value of that is hard to know."