Hewlett Packard Enterprise Hits 52-Week High On Strong Q2

Shares of Hewlett Packard Enterprise Company (NYSE:HPE) hit a new 52-week high of $18.97 on Jun 6, eventually closing at $18.90. The stock has delivered a strong year-to-date return of 24.3%. The average trading volume for the last three months aggregated approximately 10,581K.

What is Driving the Stock Upward?

HPE’s shares have been on the rise ever since the company declared robust results for the second quarter of fiscal 2016 on May 24, 2016, as well as major progress on its ongoing restructuring initiative.

This was the second quarterly earnings release by Hewlett-Packard Enterprise post its split from Hewlett-Packard Company. Notably, Hewlett-Packard Company split itself into two standalone companies — HP Inc. (NYSE:HPQ) and Hewlett-Packard Enterprise — effective Nov 1, 2015. Post the split, Hewlett-Packard Company’s PC and printer business operates under HP Inc., while Hewlett-Packard Enterprise specializes in commercial tech products.

During the second quarter of fiscal 2016, HPE’s earnings met the Zacks Consensus Estimate while revenues beat the same.

The company reported total revenue of $12.711 billion, above the Zacks Consensus Estimate of $12.419 billion and up 1.3% year over year. Notably, this was the first time in the last five years that the company’s revenues witnessed year-over-year growth. The improvement was mainly driven by strong performance at the Enterprise Group segment. On a constant currency basis, revenues increased 5% year over year, representing the fourth consecutive quarter of revenue growth.

Hewlett-Packard Enterprise reiterated its earnings guidance for the full year. The company still expects non-GAAP earnings per share between $1.85 and $1.95 (mid-point: $1.90). The Zacks Consensus Estimate for non-GAAP earnings is pegged lower than the mid-point of $1.88.

Moreover, the company still expects to return at least 100% of free cash flow to shareholders in fiscal 2016. Apart from this, the company also intends to use a major portion of the proceeds from the Tsinghua transaction (approximately $2 billion) for share repurchases.

For fiscal third quarter, the company expects to report GAAP earnings per share in the range of $1.10 to $1.14 (mid-point: $1.12) and non-GAAP earnings of 42–46 cents. The Zacks Consensus Estimate is currently pegged at 45 cents.

Adding to the positives, the company recently took a step toward restructuring its struggling IT services business as it announced the spin-off of the Enterprise Services segment, following which the segment will merge with Computer Sciences Corporation (NYSE:CSC) . The transaction is expected to allow HPE to focus on faster growing businesses and unlock value for shareholders.

The transaction, which is scheduled to close in Mar 2017, will deliver approximately $8.5 billion to HPE’s shareholders on an after-tax basis. This includes $4.5 billion in the form of equity in the combined company, $1.5 billion in cash dividend and $2.5 billion of debt assumption.

An encouraging full year and third quarter outlook and a bright overall trend resulted in upward estimate revisions for HPE. Over the last 30 days, 7 out of 11 estimates for HPE were revised upward for fiscal 2017. The Zacks Consensus Estimate for fiscal 2017 also went up 3% (6 cents) to $2.04.

Moreover, the stock looks attractive from a valuation perspective. This is because HPE currently trades at a forward P/E of 9.75x compared with the industry group average of 19.60x, which signifies a huge upward potential.

Furthermore, HPE’s strategic divestments and initiatives to return value to shareholders in the form of dividend and share repurchases are positives.

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

Currently, HPE carries a Zacks Rank #3 (Hold).