Hewlett Packard Enterprise Company’s performance during the first half of fiscal 2022 was somewhat disappointing, due primarily to the residual disruptions from the pandemic and more recent developments, including the conflict between Russia and Ukraine. Although its order book increased by 20% year-over-year in both 22Q1 and 22Q2, supply chain disruptions have delayed the delivery of products and services out of the backlog, which has restrained sales and profit margins. In addition, HPE’s inventory has ballooned this year from 64 to 106 days outstanding. The increase is due to the supply chain constraints, positioning to fulfill planned future shipments and strategic stockpiling.
After reporting disappointing 22Q2 results, management walked back its full year guidance to its original outlook given at its 2021 Securities Analysts Meeting. Ongoing supply chain disruptions, cost inflation and to a lesser extent, the cost of exiting Russia and Belarus have tempered its outlook, even though orders are up solidly this year and the backlog remains strong.
Even with the tempered outlook, it may be tough for management to deliver on its guidance. For 22H2, revenues will have to rise 5%-7% from prior year levels. 22H1 GAAP diluted EPS, excluding last year’s 22Q4 $2.35 billion litigation judgment award, will have to rise from $0.44 last year to $0.60-$0.74, according to my estimates; and overcome higher operating and financing costs. After posting negative free cash flow of $788 million in 22H1, management’s guidance implies positive free cash flow of $2.6-$2.8 billion in 22H2. In order to reach these targets, the 22H1 supply chain disruptions will have to subside in a meaningful way by year-end.
Given 22H1 results and management’s guidance, I have reduced my 2022 GAAP earnings estimate modestly to $1.20 (from $1.27 previously), which is in line with guidance of $1.17-$1.31. I have also cut my 2022 non-GAAP EPS outlook to $1.99 (from $2.09), within management’s $1.96-$2.10. For 2023, I am currently projecting GAAP EPS of $1.44 and non-GAAP EPS of $2.10.
Despite the challenges, HPE’s stock has outperformed both the S&P 500 and S&P 500 Info Tech sector. Since my previous report on Nov. 23 (to June 24), the stock is flat (on a total return basis), while the S&P 500 and S&P 500 Info Tech sector are down 16% and 21%, respectively. HPE’s stronger relative performance is a contrary indicator, suggesting a rebound may be at hand; but with the recent market developments, caution is in order. Accordingly, I am lowering my performance rating to neutral from outperform and lowering my 6-12 month price target to $15 (from $20). I will revisit these when HPE releases 22Q3 results and updates its outlook. The rating, however, is out of line with my projections; so if the projections hold, there is upside on the stock.
This is a summary of my recent update report on Hewlett Packard Enterprise Company (HPE). To obtain a copy of the full report, contact me directly.
June 29, 2022
Stephen P. Percoco
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