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4 Reasons to Buy Hewlett Packard Enterprise Stock Now

By Tim Brugger – Nov 14, 2016 at 12:15PM

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The hybrid IT king and infrastructure-as-a-service leader is flying high, and despite some measured pessimism from pundits, there’s still plenty of room for growth.

Here's a clear sign that HP Enterprise (HPE -0.74%) isn't impressing the analysts: It has a consensus target price of $23.25 a share, and it's already trading above that level. This would seem to indicate that -- in the pundits' view -- growth investors who didn't get in early enough to enjoy HP Enterprise's stellar 50%-plus gains so far this year have missed the boat.

However, though the analysts keeping tabs on HP Enterprise are, as a group, somewhat muted in their expectations,  other investors are buying significant stakes in the hybrid cloud infrastructure-as-a-service (IaaS) leader, and it's even won over a select few "experts" recently. And it's about time.

For several reasons, CEO Meg Whitman's plans for HP Enterprise are becoming clearer by the day, and those plans have the company positioned for years of growth in some of the fastest-growing markets in tech.

Image source: HP Enterprise.

Fundamentals still matter

In a time when many investors don't seem concerned about companies losing money hand over fist in pursuit of top-line growth, HP Enterprise is a welcome exception for those who actually appreciate strengths such as a solid balance sheet and other financial fundamentals. In that regard, not only is the company in the envious position of sitting on mountains of ready  cash, it's getting stronger by the day.

Last quarter was a harbinger of what investors can expect going forward. Strong operating cash flow and expense management helped boost HP Enterprise's cash and equivalents by $900 million last quarter compared to a year ago, to a whopping $10.74 billion. HP Enterprise's stellar balance sheet opens the door to a number of possibilities going forward, including its recently announced dividend boost, share buyback initiative, and SGI acquisition.

Three stocks are better than one

The strength of HP Enterprise's balance sheet will soon get a boost from its spinoff/merger deal with U.K.-based Micro Focus  (MCFU.F), though which it will shed a large chunk of its "non-core software assets." Why? Because a part of the deal, Micro Focus will be writing HPE a $2.5 billion check: but that's just one of the benefits  to shareholders.

Similar to the $8.5 billion spinoff/merger of its enterprise division with Computer Sciences Corp. (CSC), which is expected to close in March, the $8.8 billion arrangement with Micro Focus will give shareholders an approximately 50% ownership stake in the "new" company. So not only will HPE shareholders be getting three stocks for the price of one, they will also enjoy instant diversification across IT services, including a stake in "one of the world's largest pure-play enterprise software companies," a "global IT services powerhouse," along with HP Enterprise's burgeoning IaaS and hybrid cloud businesses.

Growth by reduction

HP Enterprise naysayers may point to last quarter's 6% drop in revenue  to $12.2 billion as a reason for its so-so ratings from the analysts. But here's the thing: Despite that sales decline, and even factoring in its $2.17 billion gain for the H3C divestiture, HP Enterprise's strict expense management efforts resulted in a 34% jump in quarterly earnings from operations to $328 million compared to last year's $244 million.

It was able to improve its bottom line despite the drop in sales by shedding more than $900 million in overhead. Not only will those cost savings and bottom-line results continue to improve under Whitman's watch, the merger deals will add fuel to HP Enterprise's money-saving fire.

Lean and mean

As mentioned, HP Enterprise's merger deals offer multiple benefits. One of the most intriguing aspects concerns the position HP Enterprise will be left in after the smoke clears. In discussing its spin-off decisions, the company has consistently alluded to the idea that in the future, it will be a more nimble, niche player in the IaaS and hybrid-cloud markets. And the opportunities in those arenas are nearly limitless.

As per one recent estimate, the IaaS market will expand by more than 38% this year and generate  $24.4 billion, making  it the fastest-growing segment in the cloud. Expectations for hybrid cloud sales growth are also sky-high, to the tune of $91.74 billion by 2021. That's a lot of opportunity and with its fundamental strengths, mergers, cost-cutting, and market positioning, HP Enterprise is ready to lead the charge.


Tim Brugger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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