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Market Update

Will Thursday's Moves Push HP in the Right Direction?

Despite the potential benefits of the PC spin-off and Autonomy purchase, Hewlett-Packard's narrowed forecasts are wearing on investors.

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A flurry of rumors surfaced Thursday ahead of  Hewlett-Packard's ( (HPQ)) scheduled release of its third-quarter results. Responding to the chaos, HP confirmed that it is exploring strategic alternatives for the PC division, admitted defeat on its tablet and phone strategy, announced a $10 billion software acquisition, and lowered its full-year outlook for the third quarter in a row. We view the strategic moves as a step in the right direction but expect to lower our fair value estimate about 15% to reflect the firm's poor execution, which is elongating the time frame for an operational turnaround.

The decision to separate the PC business via a spin-off or other transaction is a welcome announcement. For too long, HP's PC business has been a distraction for investors and management, occupying an outsize proportion of focus while contributing only 13% of operating income. The firm's economic moat is currently rooted in its services, enterprise hardware, and printing segments, while future competitive advantages will be driven by the moves currently being undertaken to build up the firm's software portfolio. As a PC assembler without any ability to differentiate its products, even the best execution would deliver minimal upside. HP clearly has more attractive opportunities to pursue with its time, cash, and focus.

Michael Holt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.