Hewlett Packard (HPE) Q1 Earnings: Disappointment In Store?

Hewlett Packard Enterprise Company (NYSE:HPE) is set to report first-quarter fiscal 2018 results on Feb 22. The question lingering in investors’ minds is whether this IT solution-providing company will be able to post a positive earnings surprise in the to-be-reported quarter. Notably, Hewlett Packard Enterprise has delivered positive earnings surprises in the last two quarters. So, let’s see how things are shaping up prior to this announcement.

Factors to Consider

The acquisition of EMC Corporation (stylized as NYSE:EMC) by Dell has been posing new challenges for Hewlett Packard Enterprise. With this acquisition, Dell has become one of the major players in the cloud services and data-storage market. EMC offers data storage, information security, virtualization, analytics, cloud computing, and other products and services that enable businesses to store, manage, protect, and analyze data.

Additionally, VMware (NYSE:VMW) was EMC’s subsidiary that focuses on cloud and virtualization software and services for its parent company. Therefore, the acquisition of EMC, along with its privately-controlled structure, will provide Dell an unmatched scale, strength and flexibility to deepen its relationships with customers of all sizes.

Apart from this, it also seems that Hewlett Packard Enterprise is losing market share to Dell in the server shipment. Notably, according to IDC, during third-quarter 2017, Dell managed to drastically narrow down the server shipment market-share difference with Hewlett Packard Enterprise, chiefly benefiting from “the strong synergy between its server team and the storage team incorporated from the EMC acquisition”.

This happened mainly because Hewlett Packard Enterprise is now focusing on enterprise market and “pivoting away” from the firm’s hyperscaler business, which has been denting its short-term revenues. We believe this strategy will hurt Hewlett Packard Enterprise’s to-be-reported quarter’s revenues.

Since its split from HP Inc. (NYSE:HPQ) , Hewlett Packard Enterprise has been focusing on restructuring and realigning the company’s businesses to drive long-term sustainable growth and improvise margins. In doing so, the company has spun-off its Software and Enterprise Services business. The spin-offs will surely result in an unfavorable year-over-year comparison, which means disappointing top- as well bottom-line results for the fiscal first quarter.

Moreover, Hewlett Packard Enterprise, in its previous earnings conference calls, had hinted that the company might continue to shrink with spin-offs. However, in our opinion, the company’s contrarian strategy might be in the right direction but the turnaround is still far behind as we haven’t seen any significant improvement in the recently-reported financial results. We also consider that the company is still struggling to determine its true business focus.

Also, we consider that the company’s to-be-reported quarterly results will bear the brunt of the three main challenges it is currently facing — competitive pricing, heightened commodities pricing pressure and some dilution from M&A. These headwinds are expected to thwart its overall performance in the near term.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Hewlett Packard Enterprise is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Hewlett Packard Enterprise currently carries a Zacks Rank #4 (Sell) and has an Earnings ESP of 0.00%. Notably, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

The Zacks Consensus Estimate for the quarter under review is pegged at 23 cents, representing a year-over-year plunge of 48.9%. Additionally, analysts polled by Zacks project revenues of roughly $7.03 billion, down a massive 38.4% from the year-ago quarter.

Hewlett Packard Enterprise Company Price and EPS Surprise

A Stock With Favorable Combination

Here is a company which, as per our model, has the right combination of elements to post an earnings beat this quarter:

Analog Devices, Inc. (NASDAQ:ADI) has an Earnings ESP of +0.96% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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