What to Do Now That Hewlett Packard Enterprise Co Shows Promise (HPE)

Stocks showing momentum and with enough prospects are the ones that investors like to add to their portfolio. Hewlett Packard Enterprise Co (HPE) is one such stock that looks quite promising on the back of its strong fundamentals and strategic initiatives. Though the stock faces several headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run.

So far in 2016, Hewlett Packard Enterprise has increased 57.6% compared with the Zacks categorized Computer-Integrated Systems industry that has increased 26%.

We believe there is still much momentum left in the stock, which is quite evident from its VGM Score of “A” and long-term earnings growth rate of 5.8%.

What’s Driving Hewlett Packard Enterprise?

Hewlett Packard Enterprise was spun-off from the Hewlett-Packard Company in November 2015. We believe that the decision enabled a customized approach for two different kinds of businesses, which might not have been possible as a single entity.

Hewlett Packard Enterprise has done considerably well in the enterprise class server and storage markets. The company concentrates its resources on the high-margin software and security markets as well. We believe that the company’s traction in the cloud, security and Big Data segments will enhance its growth trajectory, going forward.

Furthermore, Hewlett Packard Enterprise’s strategic divestments and initiatives to return value to shareholders in the form of dividend and share repurchases bode well.

Since the split, Hewlett Packard Enterprise’s Chief Operating Officer (CEO), Meg Whitman, has been looking to reduce the company’s large portfolio of non-core businesses that are now struggling to maintain their growth.

In keeping with this effort, the company, in September this year, announced that it will spin off the software business and merge the same with British software firm, Micro Focus International Plc, in a cash-stock deal worth $8.8 billion.

The transaction, which is subject to certain regulatory approvals, is anticipated to be tax free for the company. Per the agreement, the company will receive $2.5 billion in cash and a 50.1% stake in the merged entity, which is currently estimated to be worth $6.3 billion.

Also, Hewlett Packard Enterprise completed the sale of 84% of its 60.5% equity stake in Mphasis Limited, an IT service provider in Bangalore, India, to The Blackstone Group in September. The transaction has fetched the company around $700 million.

Furthermore, this May, it announced the spin-off of its struggling IT services segment — Enterprise Services — and entered into an agreement to merge the same with Computer Sciences Corporation.

The primary motive behind such a massive restructuring drive is to reassure investors of the company’s sustained focus on improving profitability and returning value to shareholders in the form of dividend and share repurchases.

We believe that Hewlett Packard Enterprise’s ongoing business overhaul will yield long-term benefits by supporting innovation and leading to cost savings. We also believe that successful deployment of the company’s products will boost its top line, going forward.

Moreover, the company provided encouraging first quarter and fiscal 2017 earnings guidance. For first-quarter fiscal 2017, the company expects non-GAAP earnings of 42–46 cents. The Zacks Consensus Estimate is currently pegged at 44 cents.

The company expects non-GAAP earnings per share in a range of $2.00–$2.10 for fiscal 2017. The Zacks Consensus Estimate is pegged at $2.05.

The company also provided earnings outlook for future HPE (post spin off and divestitures). The company anticipates fiscal 2017 non-GAAP earnings to come in the range of $1.25 to $1.35 for future HPE while reported earnings are likely to come between $1.45 and $1.55.

Moreover, over the past 30 days, two earnings estimates have gone higher for the full year 2017.  These revisions pushed the Zacks Consensus Estimate up from earnings of $1.98 per share to $2.05 over the same time frame.

Risks Persist to HPE

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines Corp. (IBM) and Oracle Corporation (ORCL) add to its woes.

However, we expect the aforementioned factors to help the company sustain its strong momentum and stay afloat even amid difficult times. Hence, we suggest investors to hold on to the stock as the rest is a wait-and-watch story.

One Additional Stock to Consider

A better-ranked stock in the broader technology sector is Cirrus Logic, Inc. (CRUS), which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cirrus Logic has a long-term earnings per share growth rate of 17.5%.

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