Believe the Hewlett Packard Enterprise Co Stock Turnaround Hype

There's still growth on the table for Hewlett Packard stock

Hewlett Packard stock - Believe the Hewlett Packard Enterprise Co Stock Turnaround Hype

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As far as leaving on a high note goes, now-former Hewlett Packard Enterprise Co (NYSE:HPE) CEO Meg Whitman managed to do so quite nicely. The technology giant’s fiscal first quarter results were better than expected, catapulting Hewlett Packard stock following Thursday’s post-close announcement.

Is the big gain built to last? Possibly, even if HPE shares remain erratic for the foreseeable future.

One thing is absolutely certain though. That is, the long-struggling company has finally found a winning product formula. Regardless of how the HPE stock price gyrates going forward, most analysts seem to have underestimated the company’s turnaround effort.

HPE Stock Earnings Recap

For the quarter ending in January, Hewlett Packard turned $7.67 billion worth of revenue into a per-share operating profit of 34 cents. Sales were up 11% from year-ago levels, when the company posted earnings of 16 cents per share.

Perhaps more important, last quarter’s numbers were better than the top line of $7.06 billion analysts were predicting, and better than the expected bottom line of only 22 cents per share of Hewlett Packard stock.

Storage and DC networking were the brightest of the bright spots, boasting sales growth of 24% and 27%, respectively. But, even the much-bigger Compute arm saw year-over-year revenue growth of 11%.

New CEO Antonio Neri commented on the results “Our strong Q1 performance is proof that we have the right strategy and improved execution.

We had good revenue growth across every business segment, continued to execute HPE Next with no disruption to the business, and delivered strong shareholder return in the form of share repurchases and dividends.”

HPE Next is a top-to-bottom overhaul of the company, aimed at not only making its products relevant again, but also at culling costs.

The latter didn’t happen last quarter, at least not in a meaningful way. Total costs and expenses of $7.4 billion were up from $6.4 billion a year earlier, though they did fall from a total of $7.9 billion in the previous quarter. The implementation of HPE Next only cost $245 million for the recently-ended quarter.

Turnaround Taking Hold

The effectiveness of the cost-cutting plans not withstanding, HPE did prove itself on one critical front it proved at least some buyers like what it’s now selling. The introduction of hybrid IT products, which was materializing before HPE Next was even conceived, gets the crux of any credit due.

Hybrid information technology is reference to a blend of on-site and off-site computing and storage.

Rather than massive server banks taking up room in an office building, an organization can now choose to keep only the most speed-sensitive computing functions in-house, while offloading bigger and less time-sensitive computing work (or public access to information) to an off-site service provider via the cloud.

It’s an area where HPE had become uncompetitive, though the company’s made a deliberate and successful effort to renew itself in the important market. At $6.3 billion in revenue last quarter (up 10% year-over-year, hybrid IT is by far the company’s most important business.

IDC Research chief research officer Crawford Del Prete also touts the idea that HPE Next is getting traction, explaining “They did huge cost-cutting while growing the top line. That’s pretty impressive — not something any company’s going to want to go through going forward.”

Most of those cost cuts were implemented prior to the beginning of the previous quarter. Del Prete also credits the October-2015 split of Hewlett Packard Enterprise and HP Inc (NYSE:HPQ) as freedom that’s finally paid off.

Still, HPE isn’t out of the woods yet, if recent hints from Intel Corporation (NASDAQ:INTC) are to be taken at face value. The chipmaker doesn’t expect its server business to be as strong in the foreseeable future as it’s been in the recent past.

Looking Ahead for Hewlett Packard Stock

For the quarter currently underway, the company is looking for operating earnings of between 29 cents and 33 cents per share of Hewlett Packard stock. Analysts were only looking for earnings of 26 cents, on average.

For the full year, HPE is looking for earnings of between $1.35 and $1.45 per share, versus analyst estimates of $1.18. The $7 billion earmarked for dividends and a buyback of HPE stock through the end of fiscal 2019 will drive a big piece of that projected profit.

With the light at the end of the tunnel now confirmed to not be an oncoming train, Friday’s jump is a well-deserved one. Though arguably overbought from a technical standpoint, at a forward-looking P/E of less than 14, Hewlett Packard stock has become an interesting buy-on-the-dip prospect.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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