It seems that the split from HP Inc (HPQ) in Nov 2015 has been a boon for the shareholders of Hewlett Packard Enterprise Co (HPE). This is because it allowed a customized approach to two different businesses, which was not possible while they operated as a single entity. HPE stock has been clocking solid returns since then and has gained approximately 59.7%.
The major part of the rally was witnessed last year mainly driven by a series of restructuring initiatives, which includes trimming down its core businesses and lowering costs. In 2016, the stock gained 52.2%, outperforming the Zacks categorized Computer-Integrated Systems industry’s return of 28.7% during the same time frame.
Driving Factors for Hewlett Packard Enterprises
After the split, Hewlett Packard made it clear that it will focus on restructuring and realigning its businesses to drive long-term sustainable growth and improve margins. In keeping with this effort, the company divested its stake in Mphasis Limited, an IT service provider in Bangalore, India.
Apart from this, Hewlett Packard decided to spin-off its Software and IT Services businesses last year and entered into deals to merge these with Micro Focus International Plc and Computer Sciences Corporation (CSC), respectively.
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.
Also, by trimming its size, the company intends to focus more on fast growing and high margin businesses such as high performance computing (HPC), private cloud, all-flash arrays and hyper-converged computing.
We believe that the company’s divestment strategy has provided it with enough cash to make investments in the aforementioned fast growing businesses. It should be noted that Hewlett Packard bought Silicon Graphics in November last year, which provides HPC services such as servers, storage, and data center solutions to clients in the cloud computing, oil & gas, e-commerce, social networking, and other industries.
Furthermore, it seems that Hewlett Packard views Industrial Internet of Things (IoT) as the next major market as evident from its recent partnership with GE Digital, a unit of General Electric Company (GE).
Per market research firm IC Insights, Industrial IoT implementation revenues are likely to grow 19% year over year and reach $18.4 billion in 2016. It further forecasts that implementation revenues will approximately be doubled to $29.6 billion by 2019 from $15.4 billion in 2015. We believe that the partnership with GE Digital will help Hewlett Packard Enterprise to better tap the growing opportunity in the space.
Bottom Line: HPE’s Strong Valuation is a Boon for Investors
We believe Hewlett Packard’s massive restructuring moves will complement its focus on core businesses and enable it to compete with players like Oracle Corporation (ORCL), Cisco Systems, Inc. (CSCO) and NetApp Inc. (NTAP) as well as the new entrant, Dell going forward.
Moreover, the company’s traction in the cloud, security and Big Data segments will enhance its growth trajectory, going forward. Also, its strategic divestments and initiatives to return value to shareholders in the form of dividend and share repurchases bode well.
On the valuation front too, Hewlett Packard looks very impressive. The stock currently trades at a trailing twelve months (ttm) P/E multiple of 12.0x, lower than the Zacks categorized Computer-Integrated Systems industry average of 13.2x.
Considering Hewlett Packard’s strong fundamentals along with impressive P/E ratio and the Zacks VGM Style Score of “A”, we believe that the stock is worth retaining in one’s portfolio. The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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