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Stock Analyst Update

Hewlett Packard Enterprise: Wait for Larger Discount

As a more focused organization, this no-moat company will be better able to allocate resources and execute more effectively.

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 Hewlett Packard Enterprise (HPE) reported fiscal third-quarter results that missed on the top-line versus our expectations but delivered EPS that were in line. The company also delivered a fiscal fourth-quarter outlook that was modestly ahead of our expectations, but not enough to move the needle on our $23 fair value estimate.  The company also announced its plans to spin-off and merge its software assets with Micro Focus for $2.5 billion in cash and a 50.1% equity interest in the newly combined company, which translates to $6.3 billion at current prices. Micro Focus is a pure-play software company which has experience managing mature software assets, and we like this choice of suitor given that HP Enterprise shareholders will take part in the gains of the newly combined company via the equity consideration. We are supportive of this move, and we think that as a more focused organization, HP Enterprise will be better able to allocate resources and execute more effectively. Our long-term thesis for HP Enterprise remains unchanged and we maintain our no-moat economic rating for the firm. We believe shares are fully valued at this time and would encourage investors to wait for a significantly larger discount before investing in this high uncertainty name.

Revenue in the third fiscal quarter was $12.2 billion, missing expectations of $12.6 billion and down 6% year over year. Non-GAAP operating margin came in at 9%, which was a slight improvement of 30 basis points year over year. Non-GAAP EPS came in at $0.49, representing a 9% year-over-year improvement and in line with our expectations. For the fourth fiscal quarter, HP Enterprise guided on non-GAAP EPS in the range of $0.58-$0.63. The company also tightened its non-GAAP EPS range for the full fiscal year 2016, guiding for non-GAAP EPS in the range of $1.90-$1.95, up from $1.85-$1.95.

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Timothy Feeney does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.