Notes and Analysis from HPE’s 2021 SAM

At its 2021 Securities Analyst Meeting (SAM), the management of Hewlett Packard Enterprise Company (HPE) said that the workplace changes advanced by the pandemic are proving the validity of its edge-to-cloud strategy.  HPE has experienced stronger than anticipated growth in revenues this year, as enterprises have enhanced their edge, cloud and data capabilities.  HPE continues to strengthen its portfolio in these areas, focusing especially on fast-growing niches through internal development and acquisitions.  The company forecasts that its mix of growth businesses will increase from 25% of total revenues today to 35% of revenues in fiscal 2024.

Growth in these niche businesses and in HPE GreenLake, its edge-to-cloud platform, is augmenting and replacing sales of HPE’s older, more mature compute and storage products.  On a net basis and given current trends, the company anticipates revenue growth of 3%-4% in fiscal 2022, at the high end of its long-term annual revenue growth target of 2%-4%.

HPE has also focused on streamlining its operations by optimizing its global footprint and reducing operating costs.  Management says that its two transformation programs, HPE Next and its Cost Optimization and Performance Plan (COPP), are nearing completion.  To date, HPE has incurred $2.31 billion of costs related to these programs.  It anticipates another $510 million, most of which will occur in fiscal 2022, to complete them by the end of fiscal 2023.

Besides the 3%-4% revenue growth, management’s is targeting non-GAAP EPS of $1.96-$2.10, GAAP EPS of $1.24-$1.38 and free cash flow of $1.8-$2.0 billion for fiscal 2022.

Since my previous report in June, HPE’s stock has underperformed both the broader market and its peer group (but to a lesser degree).  I had expected that the stock’s valuation multiple would increase as the cost of HPE’s transformation programs recedes, but the recent underperformance also hints at market worries about HPE’s ability to achieve its fiscal 2022 earnings guidance.  Even so, I am willing to give management the benefit of the doubt.

Accordingly, I am maintaining my outperform rating on HPE’s stock with a 6-12 month price target of $20.

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

November 23, 2021

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

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