The name Hewlett Packard is synonymous with Silicon Valley and the garage startup concept. With a history going back to 1935, the company transformed itself many times through acquisitions, divestitures and spinoffs.
In 2015, a major split was structured so that the former Hewlett-Packard Co. would change its name to HP Inc. (HPQ, Financial) and spin off Hewlett Packard Enterprise Co. (HPE, Financial) as a newly created company. HP retained the legacy personal computer and printing business, as well as its stock-price history and original NYSE ticker symbol for Hewlett Packard. At the time of the spinoff, the company's revenue was slightly less than that of HP.
Hewlett Packard Enterprise is a business-focused organization which works in servers, storage, networking, containerization software and consulting and support services. It is considered a global edge-to-cloud company that helps organizations accelerate outcomes by unlocking value from all of their collected data at multiple points. The company provides unique, open and intelligent technology solutions as a service. Segments include Cloud Services, Compute, High Performance Computing & AI, Intelligent Edge, Software and Storage,
The company assumed its current form in 2015. The market capitalization is $22.5 billion.
Edge-to-cloud strategy
As data grows and evolves and enterprises become increasingly distributed, the company’s edge-to-cloud strategy enables customers to securely access, control and maximize the value of all their workloads and data to accelerate business outcomes. The HPE GreenLake edge-to-cloud platform is an open, secure, fully integrated platform that brings a unified experience across the edge, data center, colocation and cloud.
It is mostly automated and easy to use with capacity available to scale up and down on demand. It offers true pay per use consumption so customers only pay for what they use, and they can have the entire hybrid cloud experience managed for them through the HPE GreenLake managed services offering.
Financial review
The company recently reported fiscal third-quarter results for the period ending July 31. Results were mostly in line with expectations as net revenue increased 3.5% to $7 billion on a constant currency basis from the prior-year period and increased 0.5% on a constant currency basis. Annual recurring revenue increased 48% from the year-agp period and increased 14% on a sequential basis. The was strength in the Intelligent Edge segment with revenues increasing 53%. Revenues declined in both the storage and compute markets.
The gross margin increased 1.2% to 35.9% compared to the prior-year period, but decreased slightly on a sequential basis. The operating margin was 10.3% on a non-GAAP basis. Operating cash flow was $1.5 billion in the quarter and free cash flow was $955 million.
The company’s balance sheet is a little misleading because it shows debt from the large financing division, which finances equipment sales to customers. Total operating company cash was $2.3 billion and operating company debt was $1.6 billion. Total financing assets were $13.5 billion and total financing debt was $11.9 billion. The financial services segment represents about 12% of total revenues and about 9% of operating earnings.
In a statement, Chief Financial Officer Tarek Robbiati said, “The pivot in our portfolio toward higher-growth, higher-margin markets is clearly visible in our year-over-year expansion of gross margins. Our differentiated edge-to-cloud strategy is fueling strong results in an uneven market.”
Valuation
Consensus analyst earnings per share estimates (non-GAAP) for the fiscal year ending October 2023 are $2.14 and only slightly higher for the following fiscal year. Those puts the company selling at 8 times earnings. The enterprise value/Ebitda ratio is also reasonable at only 6.
The GuruFocus discounted cash flow calculator creates a value of $26.72 using $2.14 as the starting price and 10-year growth rate of only 5%.
There are 13 Wall Street analysts that cover the company with an average price target of $18, including a high target of $21 and a low target of $15.
The company pays an annualized dividend of 48 cents, which creates a current dividend yield of 2.77%. The company also repurchases shares, which total $366 million for the nine months of the current fiscal year.
Guru trades
Gurus who purchased the stock recently include Ray Dalio (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio). Investors who have reduced or sold out of their positions include Richard Pzena (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies.
Summary
The company has tailwinds, including a product shift to higher-margin software-as-a-service revenue and an improving free cash flow profile. Potential headwinds include margin pressure from certain peers as well as a fast shift to a recurring revenue model, which can depress overall revenue in the near term.
However, CEO Antonio Neri said, “Demand improved sequentially across all key business segments, with particular strength in our HPC & AI segment as customers discover HPE’s unique capabilities to power unprecedented levels of performance for AI at scale. Our strategic shift toward edge, hybrid cloud and AI delivered through our HPE GreenLake platform is working."
Hewlett Packard Enterprise's strategy appears to be working and is on the cusp of shifting to a high-margin recurring revenue model compared to one-time enterprise and device sales. The company appears to be undervalued and represents a solid opportunity for long-term investors.
