On Thursday, Morgan Stanley (NYSE:MS) upgraded HP (NYSE:HPQ) Enterprise (NYSE: HPE) stock from Equalweight to Overweight, while also raising the price target from $23.00 to $28.00. The shares, currently trading at $21.76 and near its 52-week high of $22.82, has demonstrated strong momentum with a 30.8% gain year-to-date.
The adjustment comes as the firm anticipates the close of HP Enterprise's acquisition of Juniper Networks (NYSE:JNPR), which is expected to significantly contribute to the company's earnings.
The analyst at Morgan Stanley highlighted that the networking segment could account for 40-50% of the pro forma earnings power post-acquisition, which could lead to a re-rating of the shares. The new valuation multiple suggested is 12 times earnings, compared to the traditional 8 times for HP Enterprise, and is below the current industry multiples for hardware/networking companies.
According to InvestingPro, HPE currently trades at a P/E ratio of 15.32x and maintains a healthy dividend yield of 2.39%, having sustained dividend payments for 10 consecutive years.
The optimism is further bolstered by Juniper's recent developments, including emerging from an inventory digestion period and securing new cloud customers, which may lead to an upward revision of Juniper's short-term financial projections. This contrasts with the current stale estimates by the Street, according to the analyst.
Despite potential risks associated with the integration of the two companies, such as portfolio overlaps, Morgan Stanley's stance is that the immediate future holds more potential for positive outcomes than negative ones.
This is supported by competitive analysis and checks that suggest HP Enterprise's core numbers will remain stable in the near term, aside from adjustments in earnings per share guidance to reflect convertible and Juniper-related debt.
With a market capitalization of $28.26 billion and annual revenue of $29.02 billion, InvestingPro data shows HPE maintains a GOOD financial health score, indicating strong fundamentals.
For deeper insights into HPE's valuation and growth prospects, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.
The upgrade is made with a cautious note on the long-term success of the HP Enterprise and Juniper Networks combination, acknowledging that there could be too optimistic a view if HP Enterprise encounters unexpected challenges in its Intelligent Edge or networking business. This could happen if customers delay purchases in anticipation of the acquisition's finalization.
In other recent news, Hewlett Packard Enterprise (NYSE:HPE) has been making significant strides in its operations and financial performance. The company's third-quarter fiscal year 2024 revenue saw a 10% increase year-over-year, reaching $7.7 billion. HPE has also declared a dividend for its 7.625% Series C Mandatory Convertible Preferred Stock, underlining its commitment to shareholder value.
In a major strategic move, HPE announced the acquisition of Juniper Networks, which recently surpassed Q3 revenue and profit forecasts. Analysts from Citi and Deutsche Bank (ETR:DBKGn) have maintained a neutral stance on HPE shares, recognizing both the potential benefits and execution risks of the Juniper acquisition.
HPE has also launched the AI-focused HPE ProLiant Compute XD685 server and issued a series of notes totaling $8.5 billion. Evercore ISI, a leading investment banking advisory firm, highlighted HPE as a significant vendor to the U.S. Federal Government, suggesting that potential changes in government spending should be manageable for the company. These are the recent developments in HPE's operations and market performance.
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