Hewlett Packard Enterprise (HPE) reported earnings of 42 cents that matched estimates. Revenue of $12.71 billion beat estimates for $12.42 billion. They guided for the current quarter for earnings in the 42-46 cent range and for the full year at $1.85-$1.95 range.

The bigger news was the announcement of a spinoff of its IT services business and merge it with Computer Sciences Corp (CSC) in a merger of equals. After the spinoff, HPE expects to have $33 billion in annual revenue. HPE said the expected synergies of the spin/merger will exceed $1 billion in the first year after it closes. After the spinoff, 50% of CSC will be held by HPE shareholders. The company said there will be $900 million in separation charges and $300 million will be incurred in 2016. The spinoff is expected to be completed in early 2017.

The HP services division has about 100,000 employees and contributes more than a third of HPE revenue but lags in terms of growth and profit. By eliminating this division, HPE will be stronger and more profitable. After the merger, CSC should have revenue around $26 billion. HPE shareholders will get a special dividend of $1.5 billion and the 50% stake in CSC.

Shares of HPE rose 10% in afterhours and CSC shares rose 27%.

We have no clue what will happen to CSC shares after tomorrow but I am betting that a lot of people are going to say "Thank you, give me the money." Pigs get fat and hogs get slaughtered.

I am recommending we close the CSC position at the open on Wednesday. The LEAPS should spike significantly higher and we are going to reap a windfall gain.

Close Jan $30 call, entry $2.50, expected exit $15 or better.

I am still looking for a significant buying opportunity in the weeks ahead. While a surprise summer rally would be nice, it would definitely be a surprise.

Jim Brown

Send Jim an email