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Stock Analyst Update

Good News for HP Enterprise, Modest Fair Value Increase

We've lifted our fair value estimate due to ongoing favorable tax conditions.

Mentioned:

 HP Enterprise (HPE) beat revenue expectations again after reporting its second-quarter earnings. All segments grew year over year, with significant strength from Intelligent Edge. Management attributes the revenue growth to overall strong IT spend and a more rational customer base when it comes to HP Enterprise offering competitive pricing. On the bottom line, it was largely tax adjustments that led to a large bump in second-quarter EPS due to benefits of a lower tax burden. Consequently, we are raising our fair value modestly to $18.50 per share from $18 due to ongoing favorable tax conditions for this no-moat company.

HP Enterprise's second-quarter net revenue rose 10% year over year to $7.5 billion. Intelligent Edge was the best performing segment of the quarter, with 17% year-over-year growth. Similar to last quarter, the Aruba product was largely responsible for the spike, due to its campus switching popularity and wireless LAN turnaround. Overall, on the profitability front, HP Enterprise saw a healthy boost. Non-GAAP operating margins of 8.6% marked a 270 basis point increase year over year.

Seasonality explained the quarter's free cash flow of negative $269 million, though management noted the company is still expected to generate free cash of $1 billion in fiscal 2018. Non-GAAP diluted earnings per share just surpassed the high end of management's outlook, coming in at $0.34 per share due mainly to favorable tax conditions. Relatedly, HPE significantly bumped fiscal 2018 outlook for GAAP and non-GAAP earnings per share.

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