3 Reasons Hewlett-Packard Enterprises Co (HPE) Is Looking Good


Hewlett-Packard Enterprises Co (NYSE:HPE) reported its financial numbers for the company’s first two quarters as a separate firm since the spin-off. Until now, its bottom line has either been in line with expectations or above estimations. That itself is a good beginning for a stock that is beginning to explode. The outlook was also better than the expected levels. Some analysts have started upgrading the stock as some of the fears they had earlier expected have started receding in the recent quarterly numbers. The company also belied the skeptics’ expectations and delivered top line growth for the third straight quarter. T

Strong On Execution

Hewlett-Packard Enterprises Co (NYSE:HPE) was one of the companies that were spun-off last year like Paypal Holdings Inc (NASDAQ:PYPL) from eBay Inc (NASDAQ:EBAY). Once a company was spun-off, every investor would be keen to know how the particular company would function as an independent entity. In such a situation, some might face a struggle in execution, as well as, hitting the targets. Any miss in the target will have an adverse effect on the financial numbers. More than that investors’ sentiment would be impacted greatly. HPE was also under the similar scanner of the investors’. However, the company did well to execute its services and was hitting its targets for three straight quarters, which would not have come by luck or fluke.

It appears that Hewlett-Packard Enterprises Co (NYSE:HPE) was conscious regarding its targets and executed its plan properly to realize what it wanted. Aside from that, the company is integrating its software, hardware, and services to position itself to take available opportunities in productivity, analytics, security, and transformation. As a result, it sees opportunities to grow in the Enterprises section with a focus on expanding margins though modestly. The company is also appeared to be keen on focusing on creating cross-selling opportunities with its integrated offerings of software, hardware, and services. That might lead them to face pressure on revenue from the software during the transition period. However, the company seems to be committed to campaign for its subscription-enabled offerings, as well as, SaaS. An analyst at Brean Capital believes that the company would have to execute M&A to add key enterprise IP to its portfolio.

Strong Head Start

If the investors and analysts’ considered the three quarterly numbers, they would have been convinced that Hewlett-Packard Enterprises Co (NYSE:HPE) delivered better than expected results. On top of that, the company provided an upbeat outlook for the current year. There was no doubt that revenue has faced pressure due to the unfavorable impact of the currency. However, that happens with any company with an international presence. However, it achieved a growth on a constant currency basis in the last three quarters. In fact, it was the first time that every business category witnessed growth in constant currency since the year 2010.

Though a slow-down in China was a cause for worry for most corporatations, the first quarter results of Hewlett-Packard Enterprises Co (NYSE:HPE) suggested that it gained from the region because of the rebound in networking. One of the worries for investors the margins compared to its rivals. However, its margin expansion should soften such worries for the future quarters. Bernstein analyst sees enough scope for the company to add two percentage points gain in the margins. The company also offered an upbeat outlook for the current fiscal year 2016. The company guided its full year EPS to be $1.85 – $1.95 with mid-point being at $1.90. Street analysts’ expectation was only $1.87, which meant that the company guided three cents a share higher than their estimation. That’s why an analyst said that the consensus estimation for the current and next fiscal years was conservative only. That means there was enough room to earn more to deliver better EPS. The confidence was because the company has a number of growth assets such as Aruba and 3Par to help its hardware businesses grow.

Valuation And Other Factors

Currently, Hewlett-Packard Enterprises Co (NYSE:HPE) shares are trading around 11.3 times of price to earnings in the trailing twelve-month (TTM) period while the industry average was 16.5 times. Secondly, price to book ratio was only 0.8 times compared to the industry average of 3.9 times. The third metric for valuation was the price to sales for the TTM period, which was only 0.5 times whereas the industry is enjoying 1.7 times. Therefore, it was not just one metric but three metrics that suggested enough room for upside potential. However, the company does have a few points of worries. For instance, its average revenue growth rate for the three-period period was -5.1% while the industry average witnessed -3.2%.

Hewlett-Packard Enterprises Co (NYSE:HPE) has been experiencing growth after the split-off. Similarly, its margins were weaker than the industry average. The company has become conscious of it and is taking steps to boost the margins, which should be reflected in the upcoming quarters performances. Another factor to drive EPS growth was the share buyback program. Most recently, the company indicated its intention to buyback $4 billion worth of shares in the next one and half year’s time. The amount represented approximately 15% or more of the total outstanding shares.

Conclusion

After the spin-off, Hewlett-Packard Enterprises Co (NYSE:HPE) appears to be catching up with the rest of the industry. It has everything and the need of the hour is to position itself to execute its cross-selling opportunities to boost further its top line and margins. Most of the analysts’ have a price objective of around $19 – $20, which means there is enough opportunity for upside rewards.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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