Hewlett Packard Enterprises Regains Relevancy
Hewlett Packard Enterprises (NYSE:HPE) isn’t a name that inspires a lot of investor confidence, I know. The company used to be a darling of the market but fell from grace under the weight of intense competition and a rapidly changing digital environment. But that’s all behind, water under the bridge so to speak. Now, four years after the break up of parent Hewlett Packard, Hewlett Packard Enterprises is regaining its relevancy. The company’s shift to the cloud and edge computing puts it at the forefront of today’s hottest digital trends.
Hewlett Packard Enterprise Growth Segments Accelerate
On a net basis, Hewlett Packer Enterprise Q3 revenue is flat on a YOY basis but beat the consensus by a wide margin. The $7.21 billion beat the consensus by $0.340 billion or 490 basis points due to strength in the company’s growth segments; cloud and edge. On a sequential basis, revenue is up 5.8% and projected to grow above the pre-COVID levels over the course of the next year.
On a segment basis, the growth segments are accelerating and outperforming expectations, ie the cloud and edge, more than offsetting weakness in core computing. Revenue by segment: Intelligent Edge, $786M (up 6%); High Performance Compute & Mission Critical Systems, $975M (up 25%); Compute, $3.2B (down 5%); Storage, $1.2B (down 3%); Advisory & Professional Services, $245M (down 9%); Financial Services, $849M (down 3%).
Moving down, there is some bad news in the form of margins but even there I find a ray of light. Gross and operating margins both contracted on a YOY basis and missed their consensus targets. The good news is that margins improved on a sequential basis along with revenue and are also projected to improve in coming quarters. The miss on margins wasn’t enough to offset the company’s revenue strength. Both adjusted and GAAP earnings beat the consensus.
The best news, however, is the company’s guidance. Execs raised their F2021 projection for adjusted EPS to $1.60 to $1.78 versus the previous $1.51 to $1.76 and the consensus of $1.57. The analysts are mildly bullish on the stock, 14 of 22 analysts are neutral with 5 very bullish. The most recent analyst activity has been a series of price target increases that imply about a 20% upside from today’s prices.
Hewlett Packard Is A Deep Value
Hewlett Packard is trading at only 7X its 2021 adjusted EPS estimate compared to a much higher 22X earnings for the S&P 500. The stock also pays a whopping 4.3% compared to the S&P 500’s (NYSEARCA:SPY) average of 1.65% and there is more. Cousin HP (NYSE:HP) is trading closer to 8X earnings while Dell a more robust 9.5X and VMWare (NYSE:VMW) a stout 20X. Of those, only HPQ pays a dividend and it’s nearly 100 basis points less, about 3.5% at today’s prices.
Looking at the numbers the payout is reasonably safe too. The payout ratio is a low 31% of earnings, the company has a large cash position and ample liquidity, coverage of debt is decent, and FCF is available. The only negative is that FCF took a hit over the past year and is tight. The silver lining is that FCF is projected to improve along with revenue and earnings over the coming quarters.
The Technical Outlook: Hewlett Packard Enterprises Is In Rally Mode
Shares of Hewlett Packard Enterprises have been lagging the broad market all year but that situation is changing. The most recent activity has shares rallying off the lows and looking ready to move higher. Over the past week or so of trading days, a consolidation has formed and it looks like a bullish flag. If price action confirms with a move higher traders and investors should expect a move in the range of $2.50 or roughly 30%.
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