Why Hewlett-Packard (HPE) Stock Is Gaining Momentum Now

Shares of Hewlett-Packard Enterprise Company (NYSE:HPE) have been gaining solid momentum since last month. One of the major reasons behind this is could be management’s decision to spin off the Enterprise Services business and merge it with Computer Sciences Corporation (NYSE:CSC) .

The deal will combine Computer Sciences’ strength in insurance, healthcare and financial services with Hewlett Packard Enterprise’s expertise in fields such as transportation, pharma, technology, media and telecom. Post the merger, the combined entity will become the world’s second-largest IT services company after Accenture plc (NYSE:ACN) , generating revenues of approximately $26 billion annually.

The combined company is expected to generate cost synergies worth $1 billion during the first year and record a run rate of $1.5 billion at the end of the same. Per the agreement, shareholders of each of the companies will own about 50% of the combined company.

This merger is expected to enable Hewlett Packard Enterprise to focus better on faster-growing businesses and unlock value for shareholders.

The company announced the merger proposition on May 24. Since then, its shares have surged approximately 19%. Year to date, the stock has gained over 27%.

Some of the optimism surrounding the stock can also be attributed to the recently released global server market data for the first quarter of 2016 by two independent research firms — Gartner Inc. (NYSE:IT) and International Data Corporation (“IDC”).

As per their reports, although worldwide server revenues witnessed a year-over-year decline, Hewlett-Packard Enterprise was the only server vendor to register top-line growth during the first quarter.

Since its spilt from Hewlett-Packard Company (NYSE:HPQ) last year, Hewlett Packard Enterprise has been focused on leaving no stone unturned to expand its business. The company has taken every possible step, right from restructuring initiatives and acquisition deals to divestments and alliances, which are now paying off.

The share price appreciation may also be attributed to encouraging financial results for the second quarter of fiscal 2016. Quarterly results were announced on May 24, along with the merger proposal, wherein its top line surpassed the Zacks Consensus Estimate while the bottom line matched the same.

Going forward, Hewlett Packard Enterprise’s focus on strategic divestments and initiatives to return value to shareholders in the form of dividend and share repurchases should provide material tailwinds.

However, macroeconomic challenges and tepid IT spending are near-term concerns. Competition from International Business Machines (NYSE:IBM) and Oracle (NYSE:ORCL) add to its woes.

Currently, Hewlett Packard Enterprise carries a Zacks Rank #3 (Hold).