Hewlett Packard Enterprise's Q2 Strength Brings A Few Things Into Focus

You really can't please 'em all.

Even after posting major beats in both revenue and earnings per share Tuesday, Hewlett Packard Enterprise Co HPE failed to impress.

Bank of America downgraded the stock to Underperform. Loop Capital Markets lowered its price target from $17 to $14.50. Even Deutsche Bank, while reiterating a Buy rating on “attractive” valuation, lowered estimates based on perceived challenges in commodity costs.

Loop Managing Director Ananda Baruah was largely turned off by the company’s anticipated restructuring charges and tax payments, which he expects to limit free cash flow (FCF) through 2018. Still, he sees the potential for positive execution to generate $2 billion in FCF and unlock substantial appreciation.

Where Opportunity Lies

HP’s third quarter performance was driven by strong Server sales, growth in the Enterprise Group, and general operational improvements from having spun off its Enterprise Services business.

Now, Baruah considers HP’s focus split between four emphases: software-defined hybrid IT infrastructure, computing on the edge capabilities, Technology Services and Financial Services.

“We believe HPE’s strategy and core assets are clear with the acquisitions of Aruba Networks, ConteXstream, Rasa Networks, SGI, as well as the divestitures of Tipping Point, H3C in China, Mphasis and the spins of enterprise services and application software assets,” Baruah wrote.

He expects “potentially material” boosts in annual EPS from both the spinoff and anticipated gross savings of $1.5 billion over the next few years.

Even so, Loop Capital maintained a Hold on the stock and saw less than $1 in upside. Deutsche Bank offered greater optimism with a $16 price target. At time of publication, shares were trading at $13.69, down 2.5 percent on the day.

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