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Stock Analyst Update

Reshaping HP Enterprise Is Bearing Fruit

Meg Whitman's final quarter as CEO was marked by revenue improvement across all three segments.


 HP Enterprise’s (HPE) first-quarter results beat consensus top and bottom-line expectations. During Meg Whitman’s final quarter as CEO, revenue improved across all three segments with the largest segment, Hybrid IT up 9% on a constant currency basis. This strengthens our belief in HPE’s pivot roadmap despite current and looming product commoditization. We are raising our fair value estimate to $18 from $16 for this no-moat company due to a slightly better revenue outlook and moderate tax rate adjustments. With shares up in after-hours trading, the company looks fairly valued and we would seek a wider margin of safety before investing.

In the fiscal first quarter, revenue came in $7.7 billion, up 11% year-over-year increase (9% on a constant currency basis). However, gross margin fell by 370 basis points year-over-year and 130 basis points sequentially to 28.4%. Hybrid IT was mainly responsible for the decline as its margins were down 310 basis points due to in part to DRAM pricing. We expect the impact from commoditized pricing to continue in the near term. Nonetheless, we believe HP Enterprise’s HPE Next program for investing in its employees combined with the strength in its Edge business, which saw 9% growth year-over-year, will bring a balance to industry pressures. Additionally, HPE’s cost savings plan is projected to save $750 million over the next three years.

We expect tax reform to help HPE compete with its foreign peers as it drops to a non-GAAP estimate of 18% in fiscal 2019 onwards. HPE also plans to use the tax benefit to return $7 billion to shareholders by end of fiscal 2019, in line with former CEO Meg Whitman’s ROI approach, which new CEO Antonio Neri plans to continue during his tenure. For the second fiscal quarter, management raised guidance for non-GAAP EPS to a range of $1.35-$1.45.

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