HPE stock rose due to guidance
The stock gained 5.57% in after-hours trading. The company increased its earnings forecast for fiscal 2019. The stock has risen 5.8% in the pre-market trading as of 5:09 AM ET on Wednesday. Notably, the company raised its earnings guidance for the third consecutive quarter.
On Tuesday, HPE stock fell 0.08% and closed at $12.93. The share has declined about 0.6% on a YTD (year-to-date) basis. In comparison, the S&P 500 gained 14.5%. Unlike Cisco Systems (CSCO), other hardware players including HP (HPQ), Juniper (JNPR), and Nokia (NOK) have fallen YTD. Cisco Systems rose 10.2%, while HP, Juniper, and Nokia have fallen about 11.9%, 13.8%, and 13.3%, respectively, as of August 27.
Nokia reported upbeat earnings and revenues in the second quarter. Juniper also had strong second-quarter results. However, the company has a weak earnings view for the next quarter.
Cisco Systems posted better-than-expected second-quarter results. The company expects weak guidance due to a slowdown in China. HP managed to beat its third-quarter earnings estimates. However, the company missed the revenue estimates.
HPE’s third-quarter earnings
HPE posted an adjusted EPS of $0.45 in the third quarter. The numbers beat analysts’ expectations of $0.40 per share. The earnings also beat the company’s expected EPS range of $0.40–$0.44. Third-quarter earnings also grew around 2.3% YoY (year-over-year) despite a decline in the top line. We think that the company’s YoY earnings growth is due to higher gross and operating margins.
The company’s gross margin was 340 basis points higher at 33.9% in the third quarter. The operating margin was also 80 basis points higher at 9.9%. The company’s cost-savings efforts increase its margins.
In the third quarter, HPE returned $727 million to shareholders in the form of dividends and share buybacks. While the company paid $150 million in dividends, $577 million worth of shares were repurchased during the quarter. The company’s strong free cash flows were driven by higher profits and improved working capital management.
Lower revenues hurting earnings
HPE’s revenues reached $7.22 billion in the third quarter. The revenues beat analysts’ estimates of $7.26 billion and fell 7% YoY in the third quarter. The company posted YoY revenue declines in the past three consecutive quarters. Excluding currency and Tier 1 server sales, HPE’s revenues fell 3% YoY in the third quarter. The revenues fell due to lower sales from the Hybrid IT business, which contributes to most of the company’s revenues.
The Hybrid IT segment’s sales fell around 9% YoY in the third quarter. The sales of $5.55 billion were also lower than analysts’ expectations of $5.70 billion. The compute revenues fell 12%, which caused the Hybrid IT segment’s revenues to fall. The storage revenues fell 5% YoY in the third quarter.
The Intelligent Edge and Financial Services segments fell 3% and 4% YoY in the third quarter.
Higher earnings expectations for fiscal 2019
HPE expects its fourth-quarter adjusted EPS to be $0.43–$0.47. Notably, the mid-point of the fourth quarter guidance was higher than the levels in 2018 and in-line with the previous quarter. Analysts expect earnings of $0.44 for the fourth quarter.
For fiscal 2019, the company raised its earnings guidance. HPE expects adjusted earnings of $1.72–$1.76 compared to the earlier forecast of $1.62–$1.72 per share. Analysts expect earnings of $1.70 for fiscal 2019.
Analysts expect the sales to fall 5.9% to $7.5 billion in the fourth quarter. They also expect a sales decline of 4.4% YoY to $29.5 billion for fiscal 2019.
For fiscal 2019, HPE maintains a free cash flow guidance range of $1.4 billion–$1.6 billion. The free cash flow for fiscal 2019 was more than 35% higher than the mid-point from the previous year.
In mid-May, HPE announced that would acquire supercomputer manufacturer Cray (CRAY) for $1.3 billion. The Cray acquisition deal is expected to close by fiscal 2019. Earlier, the company expected the acquisition to close by the first quarter of fiscal 2020.
The deal will likely boost HPE’s presence in federal business and academia. The companies will also provide integrated solutions and supercomputing products to fulfill customers’ data-intensive needs.
Overall, analysts favor a “hold” rating on HPE. Among the 24 analysts that cover HPE, 21% recommend a “buy,” 21% recommend a “sell,” and 58% recommend a “hold.” The analysts expect a 12-month target price of $16.43. The stock is trading at a discount of 21.3% to analysts’ average estimates.