Hewlett Packard Enterprise (HPE) 23Q1 Update

HPE reported 23Q1 GAAP diluted EPS of $0.38 vs. 22Q1’s $0.39 and my estimate of $0.37.  Net revenue of $7.81 billion was up 12.2% over 22Q1’s $6.96 billion and my estimate of $7.33 billion.  All of HPE’s business segments recorded revenue gains in the quarter, with especially strong increases in High Performance Computing (up 28%) and Intelligent Edge (up 24.6%).  However, free cash flow (CFOA plus CFIA) was negative $1.5 billion, compared with negative $0.6 billion in the prior year period.

Management was pleased with the performance, which exceeded guidance across all key metrics.  Improving supply chain dynamics helped HPE deliver a higher proportion of its elevated backlog, avoiding the normal seasonal slowdown that typically follows the fourth quarter.  HPE is also reaping benefits from its recent investments, which are helping it to gain market share in specific targeted segments.

The wider cash flow deficit was caused by working capital changes, due to the timing of receipts and payments offset partially by inventory declines.  HPE’s cash conversion cycle increased from negative 14 days in 22Q4 to positive 15 days in 23Q1.  This is mostly reflected in a $2.2 billion sequential decline in accounts payable, a possible indicator of pressure delivering on its free cash flow target.

With the strong first quarter, management raised its revenue growth guidance from 2%-4% to 5%-7%, its GAAP EPS guidance by $0.02 to $1.38-$1.46 and its non-GAAP EPS guidance by $0.06 to $2.02-$2.10.  Its free cash flow guidance is unchanged at $1.9-$2.1 billion.  My projections are in line with guidance.

Since my last report, HPE’s stock has underperformed both the S&P 500 and the large cap technology sector, falling 12.5% compared with the gains o 1.5% in the S&P and 8.8% in technology.  The stock has been quite volatile, however, rising above $17 on January 9 and then falling to a low of $13.63 on March 15.  The stock has been rangebound for the past two years. Yesterday’s closing price (4/26) of $14.09 is near the low end of the trading range, which has proven to be a good entry point.  Although my earnings outlook is up modestly based upon management’s guidance, I am leaving my price target unchanged at $17.00.  The PT equates to 10.7 times projected fiscal 2024 GAAP EPS of $1.59 (or 8.0 times projected non-GAAP EPS of $2.12).  With the 3.4% dividend yield, the potential total return is now 24%.  Thus, I am also raising my performance rating from “3” (Neutral) to “1” (Strong BUY).

This is a summary of my recent 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:

April 28, 2023

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

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