Hewlett Packard Enterprise Investors Looking For Signs Of Stabilization

Credit Suisse maintains its Outperform rating and $25 target price on Hewlett Packard Enterprise Co HPE even as investors are looking for evidence of stabilization. Further, the brokerage sees the company as potentially being worth $31 per share in the scenario of a complete breakup.

Analyst Kulbinder Garcha believes it is likely for the company to do a complete break-up for the following reasons:

1. "Value creation narrative has changed. In 2013, management saw a full spectrum of device, hardware, software, and services offerings as the core strength, but now they split HPI/HPE and is in the process of spinning off ES."
2. "We believe Meg Whitman is willing to usher in a major change to create value for stakeholders so that she may leave on a high note within 2 years of HPE/HPI split."
3. "The company has continued to optimized the portfolio."
4. "HPE has prioritized capital return over M&A."

For FY16/FY17, Garcha expects the EPS to come in at $1.94/$2.05 and believes his estimates for the second half of FY16 will prove conservative.

Among the various segments, Garcha sees a slight deceleration in server revenue to +3.1 percent yoy for the third quarter and +2.4 percent year-over-year for the fourth quarter, but with better margins. The analyst expects storage revenue for second half FY16 to stabilize at -1 percent year-over-year versus -1 percent in the first half.

For the third/fourth quarter, networking is expected grow 12 percent/9 percent year-over-year organically. With H3C transaction, the company is expected to lose $275 million networking revenue for the networking gears that sell in China.

"On TS side, we expect revenue to grow in the 2H (+1 percent yoy vs -7 percent yoy of 1H, exH3C impact) due to stabilization in hardware maintenance and growth of New Support Solutions. We note the margin of TS is about 30 percent, very profitable," Garcha highlighted.

"Our FCF estimates are $1.7 bn /$2.0 bn for FY16/FY17 for the company overall. On the normalized basis, we estimate FCF of FY16/17 to be $3.8 billion and $3.5 billion," Garcha continued.

Shares of Hewlett Packard Enterprise closed Wednesday's regular trading session at $21.48.

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