With a consensus price target of just $23.15, HP Enterprise (NYSE:HPE) doesn't have the pundits too bullish on its immediate future. As of Oct. 31, HP Enterprise stock was sitting at $22.47, which equates to a 3% upside. Thanks to its phenomenal year-to-date gain of nearly 47%, it's easy to see why analysts think the stock has little room for near-term growth.
But there are several factors working in HP Enterprise's favor that don't seem to be factored into its so-so rating. Investors in search of relatively stable, long-term growth shouldn't shy away because of its stock price performance. The "new" HP Enterprise CEO Meg Whitman envisioned when it split with PC and printer king HP is becoming a reality.
The bottom line matters
Last quarter was a good indication of what investors can expect going forward, and it may offer some insight into why the Street's expectations are muted. One of the first metrics that jumps out from 2016's fiscal third quarter was the 6% decline in revenue compared with a year ago.
Measuring HP Enterprise's results solely on top-line growth isn't consistent with its plans for the future. Whitman has made it clear that going forward, HP Enterprise will be a leaner, more nimble company, able to quickly react to market changes and opportunities as they arise. That push is beginning to pay off, in the form of operating results.
For example, last quarter's cash flow from operations jumped 10% year over year to $1.7 billion, which has helped HP Enterprise strengthen its already sound balance sheet. Compared with 2015, HP Enterprise increased its cash and equivalents by a whopping $900 million and now boasts $10.74 billion. And that growth came in addition to an aggressive share-buyback initiative that's reduced HP Enterprise's shares outstanding by more than 100 million since last year.
Lower revenue, higher profit
Even factoring in a one-time gain of $2.17 billion relating the divestiture of H3C, HP Enterprise still reported a nearly 35% increase in earnings from operations of $328 million last quarter. The leaner, more nimble HP Enterprise is already taking shape.
HP Enterprise also shaved about $1 billion in expenses, which would have translated to essentially flat earnings-per-share results despite its drop in quarterly sales. There's more than one way to grow profits -- though top-line growth is nice, some investors appreciate a consistently profitable company, which HP Enterprise certainly is.
The recent split-merger announcements with Computer Sciences Corp. (NYSE:CSC) and Micro Focus (NASDAQOTH:MCFUF) are expected to be complete the first quarter of 2017, and each will mark a monumental step in becoming a more agile HP Enterprise. The CSC deal alone will shed some 100,000 jobs, more than half of HP Enterprise's total workforce.
The mergers with CSC and Micro Focus -- in addition to increasing margin and allowing HP Enterprise to focus on its more profitable businesses -- will also result in a 50% stake in the new companies for shareholders. That three-for-one deal is awfully attractive, but the CSC and Micro Focus moves will also benefit HP Enterprise's strong cash position even further.
In addition to part ownership in CSC and Micro Focus, the latter will also write HP Enterprise a $2.5 billion check, bringing the total value of the merger to $8.8 billion, slightly larger than the $8.5 billion arrangement with CSC. That additional cash, on top of the nearly $11 billion already on the balance sheet, opens up a lot of opportunities, including niche acquisitions.
The recently closed $275 million Silicon Graphics Inc. deal not only gives HP Enterprise a leg up in the $11 billion big-data analytics market, but it may also be a precursor of things to come. Acquiring specific technologies is a quick means of expanding its product offerings, and HP Enterprise has the financial wherewithal to do it.
For investors who appreciate profits, improving margins, and a strong balance sheet, HP Enterprise still represents a great value, regardless of what the pundits think.
Tim Brugger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.