The stock price for Hewlett Packard Enterprise Company (NYSE: HPE) received a boost from the company’s third-quarter earnings last week. However, for sustained gains to be made, several resistance levels will need to be breached. HPE’s fundamentals may be improving, but probably not enough to support such a move.
HPE beat on earnings but missed on revenue. Third-quarter non-GAAP EPS rose 7% to $0.45, while revenue fell 7% to $7.2 billion. GAAP EPS were negative due to a one-off adjustment due to the DCX arbitration ruling.
HPE operates in three main segments: Hybrid IT, Intelligent Edge, and Financial Services. The bulk of sales come through the Hybrid IT segment which saw revenue drop 9% to $5.55 billion. The Intelligent Edge and Financial Services segments saw sales fall to $762 million and $888 million respectively – both down less than 5% for the year.
A Leaner More Efficient Company
After years of declining revenue and profits, investors were more concerned with signs of a turnaround than with revenue narrowly missing estimates. In particular, analysts were pleased to see an improvement in both operating and gross margins and in the quality of cash flows. The bull case is that HPE is now a leaner more efficient business.
HPE is well-positioned to help companies enter the next phase of digital transformation. In many cases, this will require on-site and hybrid cloud solutions, which is where HPE is focusing its resources. Management also mentioned that the company is exiting all areas that can be regarded as commodity businesses to defend margins.
The fundamentals may be starting to improve, but the big picture is still not great. The forward multiple is less than 8, based on earnings growth estimates of just 5%. However, beyond that, the company will not be able to rely on margin expansion to grow earnings, particularly if revenue continues to shrink.
No Reason to Chase the Stock
This company is probably setting itself up well for the future, and its price is reasonably attractive. However, whether that’s going to mean anything in the short to medium term remains to be seen.
Most analysts are taking a neutral stance on the company with price targets around $14 to $15. The more bullish analysts have targets up to $18, or 25% higher than the current price.
Unfortunately, there are three significant resistance levels $14.60 and $15.70 and $16.70. Those levels are 5, 13 and 21% from the current price, and don’t offer worthwhile reward to risk ratios.
There is no reason to chase this stock until there is a more compelling case for upside.