UPDATE: Wells Fargo Downgrades HP Enterprise (HPE) to Market Perform
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(Updated - September 8, 2016 8:21 AM EDT)
Wells Fargo downgraded HP Enterprise (NYSE: HPE) from Outperform to Market Perform with a price target of $21-$23 (prior $23-$25). Analyst Maynard Um said he sees a lack of near-term catalysts.
"We are downgrading HPE to Market Perform from Outperform and see limited catalysts near-/medium-term as we believe the FCF story has been pushed out one year to F18 from F17 due to separation charges, catalysts from asset spin/merger announcements have now taken place, a RemainCo sale seems low, slight change in M&A tone, and pressure in the core server and traditional storage businesses," said Um.
The analyst continued, "Our prior thesis was predicated on Enterprise Services (ES) margin expansion, material FCF growth, and stabilizing revenue. While the fundamental margin expansion story still holds, margin upside in ES benefits HPE to the degree CSC shares rise (due to spin/merger), revenue is a bit more pressured in servers & storage than we anticipated, and FCF will be impacted by an incremental $700MM in F17 due to 1x separation costs, pushing out the material FCF growth story to F18. While we expect HPE to have nearly $12B in net operating cash following the spin/mergers of the ES and non-core Software businesses, or roughly half RemainCo’s implied market cap (i.e., RemainCo shares are inexpensive), the completion of these transactions are still six and 12mos away and, thus, unlikely to move shares near-/medium-term,"
Um concluded, "We believe there could be a time to revisit HPE shares into a material F18 FCF growth story but believe it is too early, particularly with limited catalysts (we may get detail to support the low RemainCo valuation at HPE’s Analyst Day 10/18 but think the value may not be unlocked until the spins occur)."
Shares of HP Enterprise closed at $22.09 yesterday.
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