HP Enterprise (HPE) Spin Provides Upside To Analyst Expectations; PT Up to $24 - Jefferies
Jefferies analyst, James Kisner, noted that HP Enterprise (NYSE: HPE) revenue totaled of $12.71B beat consensus of $12.34B. The upside came from Enterprise Group ($7.01B, Street = $6.67B) and Enterprise Services ($4.72B, Street = $4.61B). Within Enterprise Group, Networking (+18% Y/Y organically, c.c.) and Servers (+10% c.c.) were notably strong. Q2 EPS totaled $0.42, matching consensus. Limiting EPS upside was relatively weak profitability in Enterprise Group; operating margin of 11.7% missed the Street's 13.6%. Enterprise Services, on the other hand, generated operating margin of 6.7%, well above the Street’s 5.3%.
HPE announced it is spinning out ES into a new entity that would combine with CSC. HPE shareholders will own 50% of the new combined entity. Further, CSC/ES will pay HPE $1.5B in cash and assume ~$2.5B in debt and net pension liabilities. The analyst likes this deal because it provides upside to the valuation he was assigning ES in the SOTP. It also transfers some execution risk around the Services restructuring to CSC/ESC. They also think the deal makes sense strategically given the benefits of scale and limited customer/vertical overlap.
The firm reiterated its Buy rating and lifted its price target to $24.00 (from $19.50).
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Shares of HP Enterprise closed at $16.25 yesterday.