Could Security Be HP’s Unexpected Strength?
Hewlett-Packard is, after much mishegas in its C-Suite, on the mend. CEO Meg Whitman has set the expectation that 2012 is going to be a year devoted to getting the company back on track and, among other things, rebuilding its balance sheet after a year and change of painful twists and turns that have shaken the confidence of investors and analysts in the venerable tech giant, once considered a relative safe bet among tech stocks.
With its shares trading down 39 percent since the end of 2010, there’s clearly still a lot of work to be done. But analysts are taking notice and expressing new confidence. In a note to clients this morning, ISI analyst Brian Marshall says HP is looking better for a variety of reasons — one of them is its little-noticed IT security business.
If you break down HP’s various lines of business, you’ll find, Marshall argues, that its security assets are surprisingly strong. In 2009 and 2010, HP made two key acquisitions in the area of security: It spent $1.5 billion for ArcSight, a security software player; before that, it nabbed the networking concern 3Com for $2.7 billion. A key asset in that deal was TippingPoint, a network intrusion prevention product.
Marshall writes that HP’s security assets bring in about $1.5 billion in sales and are growing at about 30 percent year, with gross profit margins in the neighborhood of 80 percent. This compares favorably with security outfit Check Point, which trades at a multiple of about 10 times sales, Marshall says.
Security is going to matter a lot more to HP’s corporate customers, as they start sweating over intrusions by hackers and nation-states poking holes in the infrastructure and looking for valuable information to steal, he says.
If you conservatively assume that HP’s security assets are worth half as much as Check Point, or only five times sales, and then assume that they report a reasonable $2 billion in revenue in calendar 2012, (nearly 2 percent of HP’s expected total sales), you wind up with a business unit that’s worth about $10 billion, or one-fifth of HP’s market cap. Suddenly, the security push that HP announced in September makes a lot more sense.
Security, Marshall says, is just one leg of a four-legged stool that HP has in its favor. The other three legs are its enterprise storage, networking and server businesses, and the “seat” of the stool which tie them all together are the software and IT services businesses. The one weakness, he concedes, is its software portfolio, which has historically been small and limited, and accounts for about 2 percent of sales despite such big acquisitions as Mercury Interactive and Opsware.
Even so, Marshall sees a 30 percent upside to HP’s valuation, and has pegged it with a $34 price target and Buy rating.