Uncertainty is a concern for investors and analysts alike, so perhaps it's the pending changes at Hewlett Packard Enterprise (NYSE:HPE) that are to blame for the bearishness around it. HP Enterprise stock ended trading Friday at $24.51 a share with an average target price of $25 equal to all of 2% upside.
Those tepid attitudes could be related to the fact that analysts' time frames tend to be around 12 months, or that HP Enterprise stock has already soared 61% year-to-date. But for investors with some patience, there are several reasons HP Enterprise warrants a long look, despite the negative sentiments.
Change is good
HP Enterprise's decision to spin off and merge its Enterprise Services unit with Computer Sciences Corp. (NYSE:CSC) likely added fuel to some bears' fire. The estimated $8.5 billion deal with CSC is expected to close the end of March, about the same time another significant change should come to fruition.
HP Enterprise is also selling off most of its software division assets to another tech giant, U.K.-based Micro Focus (NASDAQOTH:MCFUF). The deal with Micro Focus is valued at a whopping $8.8 billion and will create "one of the world's largest pure-play enterprise software companies."
Before you follow the lead of those HP Enterprise analysts who are running for the hills, there are a few things worth considering as regards the CSC and Micro Focus deals. First, when the smoke clears HP Enterprise shareholders will be the proud owners of approximately 50% of each IT leader.
With their respective target markets -- IT services in the case of CSC, and enterprise software for Micro Focus -- along with HP Enterprise's cloud infrastructure and other solutions, shareholders will gain exposure to three leaders in their segments. And there are additional benefits that fall right in line with CEO Meg Whitman's vision of HP Enterprise's future.
Solid as a rock
Whitman's efforts to streamline HP Enterprise into a more nimble player in hyper-growth markets including infrastructure-as-a-service (IaaS) -- which is expected to grow over 38% this year in public cloud sales alone -- include managing costs. Last quarter, HP Enterprise shaved more than $1.6 billion in overhead, decreasing spending across every area.
The CSC arrangement is expected to remove about 100,000 employees -- and their associated costs -- from HP Enterprise's books. And the positive impact of cutting costs is already evident. Despite reporting a 2% drop in revenue to $12.5 billion after one-time items, HP Enterprise delivered an impressive 11% increase in earnings per share (EPS) to $0.61, along with better operating margin.
HP Enterprise's already rock-solid balance sheet will also benefit. A year ago, HP Enterprise was sitting on $9.84 billion in cash and equivalents, which in and of itself was more than adequate. In the recent quarter, HP Enterprise's ready cash position climbed over $3 billion to $12.99 billion and will get even better with the pending deals.
The agreement with Micro Focus, in addition to shareholders' 50.1% ownership stake, includes a $2.5 billion cash payment to HP Enterprise. So when it's said and done, HP Enterprise will be ideally positioned to fill gaps in its product suite with targeted, niche acquisitions similar to the $275 million deal for big data analytics and computing provider SGI.
One more thing
The aforementioned year-to-date stock gains of 61% might suggest HP Enterprise stock is overvalued, but in fact it's just the opposite. Based on its P/E ratio of 13, HP Enterprise is one of the least expensive alternatives in its sandbox. Looking ahead, HP Enterprise is valued at just 11 times future earnings.
Here's the bottom line: Long-term investors shouldn't let analyst negativity, pending changes, or HP Enterprise's stellar 2016 performance scare them off. It's delivering EPS growth and paring expenses. Its shareholders will soon own three IT leaders and its strong balance sheet is getting stronger. That's simply too many positives to warrant the negative sentiments.
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.