Analyst: Buy Shares Of HP Enterprise On Any Weakness

Hewlett Packard Enterprise Co (NYSE: HPE) shares suffered a sharp drop after a fourth quarter earning and sales beat.

The company issued guidance that was below first quarter estimates and announced that CEO Meg Whitman would be stepping down Feb. 1. 

The Analyst

Bernstein’s Toni Sacconaghi reiterated an Outperform rating on Hewlett-Packard with a $18 price target.

The Thesis

After announcing a replacement CEO, issuing weak first quarter guidance and with earnings more back-end loaded, “it likely doesn’t get much worse” for Hewlett Packard Enterprise, Sacconaghi said. (See Sacconaghi's track record here.) 

“A core part of our investment thesis in HPE is that EG operating margins are below normalized levels, due to the huge surge in DRAM prices over the last year and a very difficult competitive environment. Our analysis indicates that servers, storage and networking collectively had operating margins of just 2 percent in Q4, which we believe is unsustainably low,” Sacconaghi said.

For these reasons, the analyst said to add Hewlett Packard Enterprise shares on any weakness.

“With CEO Whitman stepping down, and enterprise profitability continuing to sputter, we expect near-term sentiment to be negative on HPE, and would look to add to positions." 

The analyst said he expects new CEO Antonio Neri to stay the course and does not project big changes. Neri, a relative unknown to Wall Street, is viewed as a "show me" story, and the key question is whether his strategy will be to return the company’s cash balance to investors or look to make acquisitions, according to the Bernstein note. 

While Sacconaghi lowered his fiscal 2018 EPS estimate from $1.23 to $1.20, at current multiples he said he believes the market is "overly pessimistic" on Hewlett Packard Enterprise.

Price Action

Hewlett Packard Enterprise shares traded down 7.22 percent on Wednesday to to $13.10. 

Related Links: 

HPE CEO Meg Whitman To Step Down; HP Falters In Q4

HP's Q3 Print Has One Analyst Seeing 18% Upside