Key Stats for Hewlett Packard Enterprise Co
It's over a year since the good old HP split in two. With the Enterprise until up to $24 from $16 and poor old Inc stuck at $16. Can we expect more of the same?
aside: we wrote a stockAday on HPQ back in Sept.
| Ticker | HPE |
|---|---|
| Sector | Computer Hardware |
| Latest price | $24.40 |
| Value | $40,622M |
| Daily vol | $173M |
| Date | 21 February 2017 |
Useful Links
- Latest news from Google Finance and Yahoo Finance
- Latest results from SEC Edgar
- Website: https://www.hpe.com/
Description
Hewlett Packard Enterprise is a provider of technology solutions and operates through five segments:
- The Enterprise Group segment provides its customers with the technology infrastructure they need to optimize traditional information technology (IT).
- The Enterprise Services segment brings all of its solutions together through its consulting and support professionals.
- The Software segment allows its customers to automate IT operations to simplify, accelerate and secure business processes and drives the analytics that turn raw data into actionable knowledge.
- The Financial Services segment enables flexible IT consumption models, financial architectures and customized investment solutions for its customers.
- The Corporate Investments segment includes Hewlett Packard Labs and certain business incubation projects, among others.
There have been two reasonable M&A moves recently as Wikipedia points out.
- May 2016, the spin off of the Enterprise Services unit to CSC. Target completion on 1st April 2017. As result... HPE shareholders will get 50.1% of the new company, in a tax-free spin-off of shares. Worth circa $4.5bn. The new company will inherit $2.5bn of HPE debt, and HPE will get a $1.5bn cash dividend. i.e. sale price of $8.5bn.
- Sept 2016, the spin off of the Software unit to MicroFocus in the UK. Target completion on 21st August 2017. As result... HPE shareholders will get 50.1% of the new shares, worth $6.3bn. With HPE getting a $2.5bn cash dividend. i.e. sale price of $8.8bn.
The Segments?
How important are these divisions? Well here's the company breakdown, for the full year to Oct 2016.
| Metric | Ent. Group | Ent. Service | Software | Fin Service | Corp. Investments | Total |
|---|---|---|---|---|---|---|
| Revenue | $27.2bn | $18.9bn | $3.2bn | $3.2bn | $0.003bn | $50.1bn |
| Operational Earnings | $3.5bn | $1.5bn | $0.7bn | $0.3bn | -$0.3bn | $4.2bn |
Hmmm. So HPE today worth $41bn and trading at 10x Operating Earnings, is selling Enterprise Services as 6x and Software at 13x. Now you might think 6x is low for its consulting arm but its sales were off 5% last year. And if you think 13x is low for a Software unit, well its sales were off 12%.
Sadly, what's left is hardly that exciting with the Enterprise Group and Fin Services both seeing revenues and margins down!
Recent financials
Okay, enough whining by me, let's look at the history. Though this is "adjusted" as the business really wasn't separate in 2012 to 2015, from HP Inc.
| Metric | 2016A | 2015A | 2014A | 2013A | 2012A |
|---|---|---|---|---|---|
| Revenue | $50.1bn | $52.1bn | $55.1bn | $57.4bn | $61.0bn |
| EPS | $1.82 | $1.34 | $0.90 | $1.12 | -$8.05 |
Well, it's nice to see they are squeezing more and more profit of of the business.
But remember, 2017's going to be a transitional year. They'll have sold 44% their sales and 52% of their profits for 42% of their value. Doesn't sound great. And with the business likely to swing to a $7.5bn net cash position, I wonder what will they do with the money? Any ideas? Sure there's room to buy back stock...
...but M&A sounds likely. And do you trust this management team to create value?
Competition
Let's focus on the business that survive the spin offs.
Enterprise Group:
Our primary competitors include technology vendors such as Dell, Cisco, NetApp, Lenovo, Amazon, Oracle, Fujitsu, Juniper Networks, Inspur, Hitachi, Extreme Networks, Pure Storage, Brocade, VMware, Nutanix, Google and Rackspace.
In our financing business, our competitors are captive financing companies, mainly IBM Global Financing, as well as banks and other financial institutions.
What? Is this a bit like Ford being a bank than monetize via cars?
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Hewlett Packard Enterprise Co | $50,123M | 15% | 10% |
| Brocade Communications Systems, Inc. | $2,346M | 20% | 8% |
| Cisco Systems, Inc. | $48,570M | 31% | 16% |
| Dell Technologies Inc | $55,513M | 4% | -32% |
| Extreme Networks, Inc | $535M | 4% | -31% |
| International Business Machines Corp. | $79,918M | 20% | 73% |
| Juniper Networks, Inc. | $4,990M | 22% | 13% |
| NetApp Inc. | $5,418M | 15% | 11% |
| Nutanix Inc | $524M | -45% | N/A |
| Oracle Corporation | $37,236M | 42% | 19% |
| Pure Storage Inc | $650M | -26% | -46% |
| VMware, Inc. | $7,092M | 26% | 15% |
When the spin offs are done, margins will decline on average. :( and when I look at the margins and returns of ragbag of peers, HPE doesn't stand out.
Cash / Debt?
HPE has $230M of net debt. That is Zero times it's latest operating profit. And by the end of the year... they'll be swimming in cash!
Wall Street thinks?
The professionals on Wall Street have a $24.74 for Hewlett Packard Enterprise Co and their recommendation to clients is Buy. Odd that, given it implies an upside of 1% to their target.
Valuation
Across the board, its hard to be impressed by valuations in this sector. So maybe there's an opportunity for the savvy value investor?
But if so, why would you buy HPW when there are other stocks on the same valuation, paying higher dividends and forecast to grow stronger?
| View Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| HPE | $40,622M | 12x | 1% | 1% | 17% |
| BRCD.O | $5,017M | 12x | 8% | 1% | 8% |
| CSCO.O | $169,367M | 14x | 10% | 3% | 10% |
| DVMT.K | $13,959M | N/A | N/A | 0% | 1% |
| EXTR.O | $670M | 15x | 20% | 0% | 0% |
| IBM | $171,791M | 13x | 3% | 3% | 12% |
| JNPR.K | $10,797M | 13x | 11% | 2% | 9% |
| NTAP.O | $11,062M | 15x | 15% | 2% | 7% |
| NTNX.O | $4,477M | -ve | N/A | 0% | -ve |
| ORCL.K | $172,545M | 16x | 8% | 1% | 8% |
| PSTG.K | $2,389M | -ve | 35% | 0% | -ve |
| VMW | $37,543M | 19x | 11% | 0% | 4% |
Okay, maybe just maybe the sector or even HPE can see a bit of valuation expansion, but where's the long-term growth? With Services and Software gone, there's no more "excitement" from a restructuring perspective, is there?
Dividends
Hewlett Packard Enterprise Co is forecast to pay a dividend of $0.25 per share, compared to a forecast EPS of $2.04. And yes, there's going to be buyback on top!
Catalysts
In the last 3 months the stock price has moved by 6% that compares with a change in the earnings forecasts of 6%. So the PE multiple's been stuck at 12x. Sure it was as low as 8x a year ago... but where's the catalyst from here?
On the management team's latest call with Wall Street brokers, they said
We continue to expect fiscal year 2017 non-GAAP diluted net EPS of $2 to $2.10 for the combined HPE, as it stands today. $1.25 to $1.35 for the future HPE and reported EPS of $1.45 to $1.55.
Note: Adjusted EPS was $1.92 (yes, I hate adjusted figures) in 2016. So $2.00 to $2.10, that's 4 to 9% growth. Nice, so such a boring stock. But what's with "reported" of $1.45 to $1.55. Here's the CEO's presentation. And the CFO's presentation.
cash will be significantly impacted by restructuring and separation payments, the ES pension funding
What!!! Look at the CFO's deck. A standard $3.6-3.9bn of free cashflow turns into -$1.8bn in 2017. With $0.7bn of restructuring, $1.5bn of separation payments and $2.5bn of pension payments? Suddenly the $17.3bn valuation of Services and Software looks like $12.6bn. But hey... don't worry, it's going thro' the income statement as "extra-ordinary" charges.
All that aside, they are spinning out $4.5bn of equity value for Services and $6.3bn for Software. i.e. the adjusted share price would be circa $18 a share. And they are suggesting an "adjusted EPS" of $1.25 to $1.35. i.e. today the future HPE is trading on 14x?
Hardly attractive.
Regardless, I just can't see any reason to own this stock. Ugly market, lots of competition, every catalyst I can imagine triggered, and a management team that's disappointed again and again having a massive cash pile. Oh... and someone that loves talking about "Adjusted earnings".
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Disclosure: I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author notes: u/shane_stockflare works at a financial website, Stockflare, and is a Chartered Financial Analyst.
Submitted February 21, 2017 at 05:02PM by shane_stockflare http://ift.tt/2lDLAId
