Shares of Hewlett Packard Enterprise HPE hit a new 52-week high of $23.00 on Sep 19, 2016, eventually closing at $22.68. The shares have been particularly buoyant in recent times, jumping 3.4% over the past one month. The closing share price also represents a strong one-year return of 353.2% and a year-to-date return of 49.2%.
The price increase was supported by a significant rise in share volume. Average volume of shares traded over the last three months is 10.56 million.
What is Driving the Stock Upward?
This price appreciation can be attributed to the company’s third quarter of fiscal 2016 earnings, which were announced on Sep 7, 2016, following its split from Hewlett-Packard Company. The company reported non-GAAP earnings of 49 cents per share compared with 47 cents per share reported a year ago. Moreover, non-GAAP earnings surpassed the Zacks Consensus Estimate.
The company raised the lower end of its earnings guidance for the fiscal. The company now expects non-GAAP earnings per share to be in a range of $1.90–$1.95 (mid-point: $1.925) compared with the earlier guidance of $1.85–$1.95 (mid-point: $1.90). The Zacks Consensus Estimate is pegged at $1.92.
With respect to earnings surprise, the company posted an average positive earnings surprise of 4.7%. The company has a market cap of $37.07 billion with long-term earnings growth expectation of 5.5%.
Over the last 60 days, nine out of 11 estimates for Hewlett Packard Enterprise were revised upward for fiscal 2016. The Zacks Consensus Estimate for fiscal 2016 increased 2.1% to $1.92.
Moreover, the stock looks attractive from a valuation perspective. This is because Hewlett Packard Enterprise currently trades at a forward P/E of 11.59x compared with the industry group average of 44.30, which signifies a huge upward potential.
Although recently released data for second-quarter 2016 by two independent research firms – Gartner Inc. and International Data Corporation (“IDC”) – state that global server market revenues have witnessed a year-over-year decline, we believe that there is still a huge growth opportunity in the hyperscale server infrastructure space with more and more companies shifting to cloud-based storage.
Kuba Stolarski, Research Director, Computing Platforms at IDC stated, "The server market is progressing exactly as expected, with close to flat growth in the second quarter, following a difficult first quarter, but growth in volume servers is still healthy, which is a good sign for the market moving forward”.
Stolarski further added, “As we prepare for the second half of 2016, we expect to see market growth led by cloud datacenter buildouts from key hyperscalers. Looking out further, the market will be impacted by digital transformation initiatives, including the Internet of Things and cognitive computing, and by a continuing shift towards software-defined infrastructure."
We believe Hewlett Packard Enterprise can tap opportunities owing to the improving server market in the long run. Hewlett Packard Enterprise’s massive restructuring moves will complement its focus on core businesses and enable it to compete with players like Oracle ORCL, Cisco CSCO and NetApp NTAP as well as the new entrant, Dell going forward.
Furthermore, the company has done considerably well in the enterprise class server and storage markets. The company concentrates its resources on the high-margin software and security markets as well. We believe that the company’s traction in the cloud, security and Big Data segments will enhance its growth trajectory, going forward.
Also, its strategic divestments and initiatives to return value to shareholders in the form of dividend and share repurchases bode well.
Hewlett Packard Enterprise has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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