Technology
Why Oppenheimer Sees Big Upside in Hewlett Packard Enterprise
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After historically taking a siloed approach to managing the business, Hewlett Packard Enterprise Co. (NYSE: HPE) is working to integrate its research and development (R&D) and go-to-market efforts across product areas and business units. Considering its leading presence in each major information technology (IT) hardware segment and IT services, one key analyst believes that HPE has a unique opportunity to emerge as a leading IT provider.
Oppenheimer initiated coverage of HPE with an Outperform rating and a $21 price target. This price target implies an upside of roughly 22% from the current price level.
Overall this bullish thesis is centered on a few things:
The company’s efforts to improve operating margin offer significant upside potential. Targeting Enterprise Services margin of 7% to 9% by fiscal 2018, HPE is reducing headcount (25,000 to 30,000 employees), consolidating service centers and shifting headcount to lower-cost locations. Illustrating the potential upside, Oppenheimer estimates that for each percentage point there is in Enterprise Services margin, there is an increase of $0.08 in incremental earnings per share.
Oppenheimer detailed in its report:
Our positive view is focused on HPE’s strong recurring revenue/FCF generation. Once restructuring payments cease after FY18, FCF could exceed $4B/year. We expect over 50% return to shareholders (down from 100% FY16 target). We estimate about 42% of revenue and about 52% of operating profit come from recurring sources. We view this as a strong indicator of FCF stability.
Shares of HPEÂ were trading down 1.8% to $16.95 Friday morning, with a consensus analyst price target of $17.35 and a 52-week trading range of $11.63 to $18.55.
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