Oppenheimer Remains Positive On HP Enterprise Following Earnings, Deal With CSC

Oppenheimer maintains its Outperform rating on Hewlett Packard Enterprise Co (NYSE: HPE) following solid quarterly results and its deal with Computer Sciences Corporation (NYSE: CSC).

Earnings Numbers

Hewlett Packard reported solid second-quarter results, posting year-over-year growth for the first time since 2011. In addition, it announced its plan to spin off of its low-margin enterprise services (ES) segment and its subsequent merger with Computer Sciences.

Hewlett Packard reported revenue/EPS of $12.71 billion/$0.42 versus consensus estimate of $12.34 billion/$0.42. The results showed positive growth across all three hardware segments (servers, storage and networking) and geographies despite the challenges reported by its peers. All the three hardware segments posted growth of 6.9 percent, 1.6 percent and 57.2 percent, respectively.

Related Link: Deutsche Bank On Computer Sciences-HP Enterprise Merger

However, software continued its downturn, with revenue dropping 13.2 percent and enterprise group operating margin was at 11.7 percent versus consensus' 13.6 percent. Technology services revenue also remains challenged with a decline of 5.6 percent.

For the third quarter, Hewlett Packard sees non-GAAP EPS to be in the range of $0.42 to $0.46 and GAAP EPS of $1.10 to $1.14. While third-quarter EPS guidance was a little below consensus' $0.48, it's largely due to the result of the H3C sale.

However, Hewlett Packard affirmed its fiscal 2016 non-GAAP EPS outlook of $1.85 to $1.95 and updated fiscal 2016 GAAP EPS view to a range of $1.68 to $1.78.

Analyst's Take

"Overall we view the results and the spin-off/merger positively and in line with our turnaround thesis," analyst Ittai Kidron wrote in a note.

Kidron raised 2016 EPS view to $1.90 from $1.86 and revenue forecast to $51.4 billion from $51.1 billion. The Street estimates earnings of $1.88 a share on revenue of $50.74 billion.

Meanwhile, the announced deal accelerates Hewlett Packard's ability to unlock further shareholder value, and leaves the company with a more streamlined business having a better revenue growth and margin profile.

"With share buybacks of $4.8 billion to be completed through FY17 and a better growth/margin, we see attractive value in the shares as execution remains strong," Kidron noted.

"The pending ES spin-off, massive share buybacks, and continued strong execution in EG leave us comfortable that HPE is on the right track," Kidron added.

At time of writing, shares of Hewlett Packard were up 6.52 percent to $17.31. The analyst has a price target of $21 on the stock.