Why Should You Hold On To Hewlett Packard (HPE) Stock For Now

At times, it is prudent to retain certain stocks that have enough potential but are weighed down by tough market conditions. Hewlett Packard Enterprise Company (NYSE:HPE) seems to be one such stock, which investors need to retain if they are looking to reap long-term gains. 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.

Further, during the year-to-date period, the stock has gained 0.01%, against the industry’s loss of 3.9%.

What’s Going in HPE’ Favor?

HPE reported modest fourth-quarter fiscal 2017 results, wherein the bottom line surpassed the Zacks Consensus Estimate by a penny. The company’s non-GAAP net earnings from continuing operations of 29 cents per share beat the Zacks Consensus Estimate of 28 cents and also came toward the higher end of management’s guidance range of 26-30 cents. Further, the figure jumped 26.1% on a year-over-year basis.

The better-than-expected bottom-line performance was primarily owing to cost savings, lower tax rate, favorable other income and expense as well as transactions in connection with Software-spin merger.

HPE reported revenues from continuing operations (which includes Enterprise Group and Financial Services) of $7.660 billion, up 4.6% from the year-earlier quarter’s revenues of $7.324 billion.

We consider that divestment of Software division is in best interest of HPE. The company has sold this division to British firm, Micro Focus, in a cash-stock deal worth $8.8 billion. HPE has received $2.5 billion in cash and the remaining consideration in the form of a 50.1% stake in the combined company. The software division generated fiscal 2016 revenues of $3.2 billion, down 11.8% from fiscal 2015 level. Moreover, it includes the highly controversial Autonomy acquisition that was mostly written down by the current CEO Meg Whitman.

It also includes other buyouts like Mercury Interactive and Vertica. Consequently, by selling assets which are not doing well and have limited growth potential, the company will be able to mobilize resources to the fast-growing areas of the cloud such as software defined networks (SDN), and converged and hyper-converged infrastructure.

Moreover, the stock looks attractive from a valuation perspective. This is because HPE currently trades at a forward P/E of 11.18x compared with the industry group average of 76.30x, which signifies a huge upward potential.

The stock’s long-term earnings per share growth rate is 6.6% and it carries a VGM Style Score of A.

Concerns Remain

In a sudden move, Meg Whitman has decided to step down as the Chief Executive Officer (CEO) of HPE, leaving the company in the middle of its restructuring phase to cut costs and focus on high-margin businesses.

Whitman has been replaced by Antonio Neri who also serves as the current president of HPE. Whitman will continue to function as a member of Board of Directors. Antonio will function as the CEO of HPE effective from Feb 1, 2018.

Moreover, the company issued a disappointing bottom-line guidance for first-quarter 2018. HPE expects non-GAAP earnings per share in the range of 20-24 cents (mid-point: 22 cents), which was lower than the Zacks Consensus Estimate of 27 cents.

The company also provided outlook for 2018. HPE expects non-GAAP earnings per share for 2018 in the range of $1.15-$1.25 (mid-point $1.2). The Zacks Consensus Estimate was pegged at $1.17.

We remain slightly cautious about the company’s near-term prospects due to three main challenges it is currently facing — heightened pressure from unfavorable currency exchange movements, elevated commodities pricing and some near-term execution issues. These headwinds are expected to thwart overall performance in the near term.

Further, macroeconomic challenges and tepid IT spending remain other concerns. Competition from International Business Machines (NYSE:IBM) and Oracle (NYSE:ORCL) adds to woes.

Our Take

We are encouraged by the company’s massive restructuring initiatives. On one hand, it is offloading low-margin business such as Software, which, in our opinion, will improve the company’s margins over the long run. On the other hand, it is enhancing capabilities in the hybrid IT model as evident from the recent agreements to acquire SimpliVity and Cloud Cruiser. We believe the company’s focus on hybrid IT model will drive growth over the long run.

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 at the moment.

Stock to Consider

A better-ranked stock in the broader technology sector is NVIDIA Corporation (NASDAQ:NVDA) , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA has a long-term earnings per share growth rate of 11.2%.

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