3 Reasons Hewlett Packard Enterprise Co Stock Could Rise

By Markets Fool.com

A stock that's jumped 47% year to date, as HP Enterprise (NYSE: HPE) has in 2016, and is bumping up against its 52-week high, isn't likely to appeal to many investors. Now toss in analysts' consensus stock price estimates of just $23.02 a share -- a paltry 3% above its Oct. 7 closing of $22.34 -- and it would be easy to dismiss HP Enterprise as a train that's already left the station.

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But investors shouldn't throw in the proverbial towel just yet. As HP Enterprise demonstrated last quarter, it's not only carved out a definitive path for future growth, but it's already beginning to deliver. And if HP Enterprise continues producing in a few strategic areas, shareholders will have more to smile about in the years ahead.

Image source: HP Enterprise.

Three is better than one

The decision to spin off and then merge HP Enterprise's services business with Computer Sciences Corp (NYSE: CSC) in a deal valued at approximately $8.5 billion was an eye-opener. The Enterprise Services group is HP Enterprise's second-largest division, generating $4.7 billion in revenue last quarter. That said, the unit has underperformed in several respects.

Revenue declined 3% after accounting for currency and divestitures, and the enterprise service unit's meager 8.3% operating margin in fiscal 2016's third quarter really struck a negative chord. Because of HP Enterprise's shedding of its money-losing division, shareholders will pocket an estimated 50% ownership stake in the "new" CSC, cost synergies will total $1.5 billion after year one, and HP Enterprise margins -- a primary objective of CEO Meg Whitman's transformation plans -- will get a boost.

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Last month HP Enterprise also struck a CSC-like deal with U.K.-based Micro Focus (NASDAQOTH: MCFUF) to spin off and merge the "non-core software assets" of its money-losing software division. The deal is valued at a whopping $8.8 billion, which includes a $2.5 billion cash payment and 50.1% ownership for HP Enterprise shareholders -- all for a unit that reported $738 million in sales last quarter.

Lean and mean

One of the reasons HP Enterprise split with tech industry mainstay HPlast November was to unlock shareholder value, in large part by becoming a more efficiently run business. The strides HP Enterprise has already made along those lines are nothing short of spectacular.

In fiscal 2015's third quarter, HP Enterprise's operating expenses totaled $12.8 billion, nearly eclipsing its $13 billion in revenue. Fast forward to this year's third quarter, and HP Enterprise's overhead dropped to $9.7 billion. Naysayers may point out that $2.17 billion of its reduced expenses was due to the shedding of HP Enterprise's H3C business, and they'd be right.

However, even after accounting for the ouster of H3C, HP Enterprise pared approximately $1 billion in overhead last quarter. The result was a 34% pop in earnings from operations, to $328 million, after accounting for the H3C move. Those are impressive results, particularly given the relatively short time HP Enterprise has had to implement its cost-saving initiatives.

Focus, focus, focus

The aforementioned cost savings played a critical role in the decision to part ways with HP, but it wasn't the only reason HP Enterprise opted to follow its own path. As Whitman emphasized in both the CSC and Micro Focus spinoff announcements, the objective is to position HP Enterprise with a laser-like focus on what it does best: providing "secure hybrid IT solutions, leveraging its world-class portfolio of software-defined servers, storage, networking and converged infrastructure."

Infrastructure as a Service (IaaS), one of HP Enterprise's core competencies, will generate an estimated $38 billion in sales this year. Big deal, right? That figure is expected to more than quadruple, to $173 billion, over the next 10 years, and HP Enterprise is positioning itself to lead the charge.

In today's fast-paced tech world, being able to quickly adapt to changing market conditions has never been more crucial. With the company's spinoff-mergers in the works, cost-saving initiatives taking hold, and a renewed focus on what it does best -- rather than trying to be all things to all people -- HP Enterprise stock is ideally positioned for growth in the months and years ahead.

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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.