Hewlett Packard Enterprise (HPE) 22Q4 Update

HPE reported a 22Q4 GAAP loss of $0.23 per diluted share vs. earnings of $0.31 in 21Q4.  My estimate called for earnings of $0.37.  All of the shortfall was due to a $905 million ($0.68 per share) goodwill impairment charge taken against its High Performance Computing and Artificial Intelligence (HPC & AI) and Software businesses.  Excluding this charge and other adjustments, its non-GAAP EPS was $0.57, vs. $0.50 last year and my estimate of $0.57.  Net revenue of $7.87 billion exceeded 21Q4’s $7.35 billion and my estimate of $7.57 billion.  Free cash flow of $2.0 billion, was up 5.3% YOY and also matched my estimate.

22Q4 net revenue was the second highest on record for the company’s continuing operations.  It was also HPE’s most profitable quarter on a non-GAAP basis since 2017.  This shows that the company’s product and service offerings, especially its GreenLake edge-to-cloud platform, are resonating with customers.  With solid order growth for the fiscal 2022, HPE begins its new fiscal year with a larger order book.

Despite ending the fiscal year on a strong note, management’s guidance anticipates only modest net revenue growth of 2%-4% and little or no improvement in profitability in 2023.  Its GAAP EPS guidance of $1.38-$1.46 compares with fiscal 2022’s actual results of $0.66 (or $1.34 excluding the goodwill impairment charge).  Non-GAAP EPS guidance of $1.96-$2.04 is essentially flat from 2022’s $2.02.

My projections are in line with that guidance.  I have reduced my fiscal 2023 GAAP EPS estimate from $1.46 to $1.39 and my non-GAAP EPS estimate from $2.10 to $2.02.  For fiscal 2024, I am projecting GAAP EPS of $1.52 and non-GAAP EPS of $2.09.

HPE’s stock has rallied 37% from its September low to close today at $16.20.  Based upon the associated increase in HPE’s forward P/E multiples, I am raising my price target to $17.00 (from $15.00), which equates to 11.2 times projected fiscal 2024 GAAP EPS of $1.52 and 8.2 times projected non-GAAP EPS of $2.09.  With the stock’s 3.0% dividend yield, that represents a potential total return of just under 8%.  Consequently, I am also maintaining my performance rating of “3” (Neutral).

As long as the global economy sidesteps a potential recession and the headwinds to HPE’s performance – i.e. supply chain challenges, cost inflation and supply chain challenges – recede (or at least do not worsen), there should be more upside potential to HPE’s earnings outlook than downside risk over the next year.

This is a summary of my recent update report on Hewlett Packard Enterprise Company (HPE). To obtain a copy of the full report, please reach out to me using the contact information provided below.

December 15, 2022

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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