Hewlett Packard Enterprise Co.: Is It Too Late to Get on Board?

By Markets Fool.com

Analysts' price targets and opinions are not enough to base a stock-buying decision on, but they can give a snapshot view of what the Street likes, or dislikes, about a given company.

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In Hewlett Packard Enterprise's (NYSE: HPE) case, analysts aren't too enamored. For example, HP Enterprise's consensus price target is a mere $22 a share, which is well within the stock's current range. Now toss in a whopping 42% jump in share price so far this year, and it may appear the HP Enterprise train has already left the station. But don't dismiss HP Enterprise quite yet: CEO Meg Whitman has several growth opportunities up her sleeve.

Image source: Hewlett Packard Enterprise.

A peek in the rearview mirror

HP Enterprise's surprisingly strong second-quarter earnings marked the first time since 2011 -- when Whitman took the helm of the "old" Hewlett-Packard, now HP (NYSE: HPQ) -- that HP Enterprise-related businesses reported a year-over-year increase in revenue.

The 1% year-over-year improvement in sales, to $12.7 billion -- which was 5% after accounting for currency effects -- may not seem like much, but it demonstrated the right kind of momentum. Longtime investors have seen what a rumor or particular announcement can do to a stock as short-term traders jump in trying to make a quick point or two, but HP Enterprise's momentum is actually worth noting.

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The enterprise group is HP Enterprise's largest revenue contributor, and it performed admirably in Q2, climbing 7% from the same period last year, to $7 billion. That's a sign of things to come, as the unit is home to HP Enterprise's server, networking, and storage solutions -- much of which are delivered via the cloud -- and will drive much of the sales momentum going forward.

Two for one

In what is widely viewed as a positive move for all parties involved, HP Enterprise also announced it will spin off its enterprise services division and subsequently merge it with one of the leading IT service providers around: Computer Sciences Corporation (NYSE: CSC). The spinoff-merger is expected to be completed in March 2017.

The deal will give existing HP Enterprise shareholders an estimated 50% stake in the new combined entity, which is expected to instantly become what HPE calls a "$26 billion pure-play in global IT services." Synergies are expected to generate $1 billion in expense reductions out of the gate, and climb to $1.5 billion by the end of year one. The transaction is expected to deliver roughly $8.5 billion to HPE shareholders on an after-tax basis, which includes the equity stake in the new company ($4.5 billion), a cash dividend ($1.5 billion), and the assumption of $2.5 billion of debt and other liabilities..

As it stands, enterprise services is a key component of HP Enterprise's total revenue, contributing $4.7 billion in sales last quarter. However, that was down 2% compared to last year, and the move to spin the unit off is a means of unlocking its true value. It will give HP Enterprise shareholdersa piece of a services business expected to skyrocket in today's ever-changing tech world.

Time to focus

In addition to providing HP Enterprise shareholders a piece of a "pure-play" services firm, the CSC deal will also give the enterprise group and its struggling software unit a clearer path and focus in the fast-growing, and highly competitive, cloud and mobile marketplace, which includes Infrastructure as a Service (IaaS). Though IaaS will generate "only" an estimated $38 billion this year worldwide, that is expected to grow to $173 billion over the next 10 years.

Post-spinoff,HP Enterprise will be in a position to unlock "faster-growing, higher-margin and stronger free cash flow," according to the company. Whitman said the $33 billion in annual revenue expected from a leaner HP Enterprise will come from providing its global customers with "secure, next-generation, software-defined infrastructure that leverages a world-class portfolio of servers, storage, networking, [and] converged infrastructure."

Changes are coming at HP Enterprise, but the changes will give the company even more positive momentum going forward. All that revenue upside -- despite HP Enterprise's stellar stock price run this year -- translates to a valuation of just 10 times forward earnings. There's still time to board the HP Enterprise train, and it is poised to provide an enjoyable ride.

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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.