So far, so good for Hewlett-Packard Enterprise (NYSE:HPE) shareholders following the split with HP (NYSE:HPQ). The new HP Enterprise stock has skyrocketed 44% year to date. Though CEO Dion Weisler's HP hasn't quite matched HP Enterprise, it's hard to complain about 23% appreciation so far in 2016.
As for HP Enterprise, investors might look at its stellar performance so far in 2016 and wonder if it's too late to jump on board. That's a legitimate question, and one that analysts -- based on consensus price target estimates of $21.26, which is about where its stock price is right now -- would suggest that the HP Enterprise train has already left the station.
But don't be too quick to dismiss HP Enterprise. CEO Meg Whitman and team are in the right markets at the right time, even with its meteoric stock price jump it's still undervalued, and there are changes on the horizon that will be a boon for shareholders.
Still on sale
Prior to the split with HP, the combined company's stock had taken a merciless drumming -- and rightfully so. It was almost as if the now-two businesses were tripping over each other, and Hewlett-Packard shareholders were paying the price.
As it relates to HP Enterprise stock's value, the fact it had been under so much pressure helps explain why even currently it's still trading at a mere 17 times trailing earnings. And the current valuation as measured by HP Enterprise's trailing price-to-earnings ratio (P/E) isn't even the best part. Based on expectations for the coming year, HP Enterprise stock is trading at just 10.75 times forward earnings.
HP Enterprise's relative value paints a nice picture for investors, but better still is how Whitman and team were able to improve earnings-per-share (EPS) by a whopping 12% last quarter with a "mere" 1% increase in total revenue: the first year-over-year revenue improvement in five years. Even with the sales improvement, HP Enterprise expenses were essentially flat. Rising sales without increasing overhead? That's a nice combination.
Right place, right time
In many respects HP Enterprise's emphasis on providing cloud, mobile, and Internet of Things (IoT) related technology solutions, "software-defined infrastructure," and networking platforms as opposed to HP's hardware-focus has made life for Whitman and team a bit easier. To its credit, HP's transition to virtual reality-ready (VR) PCs and ultra-thin detachable tablets is not only keeping its head above water, it's thriving.
The bottom line is that the market for HP Enterprise's solutions is poised to explode in the coming years. Thanks in large part to the onset of a digitized world, the amount of data -- and the need for companies from virtually all industries to transfer and utilize all that information in the cloud -- has created a huge opportunity for HP Enterprise.
According to research firm IDC, in 2015 about 1% of apps utilized cognitive services. That is expected to rise to 50% in just two years. And by 2017, two-thirds of the CEO's of the world's largest companies will have "digital transformation" as a centerpiece of their company's corporate strategy. That kind of widespread transformation won't be managed by IT departments alone.
One of each, please
HP Enterprise is close to expanding its suite of service solutions to serve the aforementioned companies making the transition to a digital world. HP Enterprise's tax-free spin-off and subsequent merger with Computer Sciences Corp (NYSE:CSC) is expected to be finalized early next year.
Combined, HP Enterprise expects the new, as yet unnamed entity, will generate $26 billion in revenue annually, improve margins, save $1 billion in expenses, and increase free cash flow. HP Enterprise shareholders will own 50% of the new strategic consulting services firm, which translates to an estimated $8.5 billion value.
In addition to the obvious benefits to shareholders, the spin-off and merger with CSC is yet another example of HP Enterprise's efforts to maximize efficiencies in the ever-changing tech industry. HP Enterprise has had a stellar run, but that shouldn't scare off investors: It still offers great value and it's positioned to take full advantage of fast-growing markets. In other words, the best is still to come.