Wells Fargo analyst, Maynard Um expects to see margin expansion, and FCF growth after HP Enterprise (NYSE: HPE) reported in line revenue with slighlty better than expected margins. He sees 5 reasons shares will Outperform in the coming year: 1) material recurring profits, 2) revenue stabilization, 3) margin expansion helped by mix/restructuring, 4) potential for year-over-year cash flow improvement, 5) attractive valuation at 7.1x F16E EPS of $1.92.

HPE reported a solid quarter with revenue growth across business segments excluding the impact of currency and divestitures. Operating margins improved and will likely continue, due to improved business mix and restructuring benefits. HPE maintained its FY16 EPS and free cash flow (FCF) guidance and expects to return at least 100% of its FCF (prior target was 50%) to shareholders.

The Good:

1) strong FQ1 results with constant currency (cc) growth in all businesses (excl. divestitures), for the first time since 2010

2) maintained FY16 EPS guide

3) repurchased $1.2B in shares and increased target to return 100% of its FCF

4) Enterprise Services operating margin of 5.1% improved 210bps y/y

5) server sales were strong at 5% yr/yr cc

6) storage sales accelerated yr/yr with 3% cc growth (vs flat last quarter)

7) networking sales exceeded estimates with double-digit yr/yr growth at cc

8) Enterprise Services book-to-bill was roughly 1.

The Bad

1) FQ1 FCF of -$831MM was below estimates (seasonality and bonus payments as well as charges)

2) Technology services (TS) sales were below estimates and declined 3% yr/yr at cc

3) TS orders continue to be impacted by customers in China waiting for the JV to close

FY16/FY17 EPS ests increase to $1.92/$1.98 from $1.90/$1.96. No change to Outperform rating.

For an analyst ratings summary and ratings history on HP Enterprise click here. For more ratings news on HP Enterprise click here.

Shares of HP Enterprise closed at $13.60 yesterday.