Macquarie Starts Coverage Of Hewlett Packard Enterprise, But Isn't Buying Yet

Macquarie initiated coverage of Hewlett Packard Enterprise Co (NYSE: HPE) with a Neutral rating and $13 price target saying that though the company would benefit from a spinoff, it is too early for HPE to stem the market share declines in a challenging industry environment.

"While we believe HPE is likely to benefit from the strategic focus engineered by its recent spin-off, we believe the current fiscal year is too early to see any materially significant improvement in its ability to arrest market share declines in a significantly challenged Enterprise IT marketplace," analyst Rajesh Ghai wrote in a note to clients.

The analyst also expressed skepticism whether the company could maintain its free cash flow forecast issued in September amid tepid macro conditions and a strong dollar. The company had estimated free cash flow of $2.0 billion to $2.2 billion in fiscal 2016 or normalized free cash flow of $3.7 billion before separation and restructuring cash payments.

"We will not be surprised if the FCF guidance is revised downwards, considering the assumptions underpininng the original Sept.15 guidance is unlikely to hold five months later when the company reports its first full quarter as an independent company on Feb. 24," Ghai noted.

The analyst said though HPE has broad fairly-competitive portfolio addressing large IT markets, recent industry conversations suggest the company is more nimble and focused compared to its past.

Early signs from HPE Discover suggest the company may be turning a new leaf in product innovation, which augurs well for market share. In addition, a cheap and strong decisive management team led by Meg Whitman stands as investment positives for the company.

However, the Cloud is a headwind and not a tailwind for most businesses within HPE's Enterprise and Software groups and global presence means it is not immune to macro and currency risk.

"Its Services business is likely to come under relentless deflationary pressure from overseas outsourcing players and may not grow in the foreseeable future. Net Debt position constraints ability to aggressively buyback and acquire near-term Dividend yield pales in comparison to other large cap techs such as CSCO and EMC," Ghai added.