Why We Revised Our Price Estimate For HPE To $18
We have recently revised our price estimate for Hewlett-Packard Enterprise (NYSE:HPE) from $23 to $18, a 24% downward revision in price. The primary reason for the downward revision was the successful spin-off of HPE Enterprise Services into the newly formed entity called DXC Technology. The company believes that the separation of Enterprise Services business unlocks a stronger, more focused HPE that will focus on high-end enterprise hardware and customer services. Additionally, the transaction delivers approximately $13.5 billion in expected after-tax value to HPE and its stockholders. Post the separation, the company has adjusted its FY17 outlook to reflect the completion of the spin-off. Consequently, we have made the corresponding changes to our model. While we expect that revenue for the company will improve marginally in 2017, we forecast margins to decline to around 18%, reflecting the change in revenue mix towards a more hardware-centric revenue stream.
For precise figures, please refer to our full analysis for Hewlett Packard Enterprise
HP Services Spin-Off Impacts Top And Bottom Line
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HP Services contributed nearly 36% to the HPE’s top line in 2016. It also accounted for nearly 30% of the EBITDA. We estimate that the company will report revenues of close to $32.4 billion in calendar year 2017, which translates into 6% growth if enterprise services revenues are excluded. The company estimates that the DXC transaction delivers approximately $13.5 billion in expected after-tax value to HPE and its stockholders including DXC stock, a cash dividend payment as well as the assumption of debt and other liabilities by DXC.
Revised Guidance Post Transaction
HPE adjusted its fiscal 2017 second quarter and full year outlook following the transaction. According to the company, the transaction will impact HPE’s Q2 diluted net earnings per share (EPS) by approximately $0.08, and FY 2017 (Fiscal year ends in October) diluted net EPS by approximately $0.42.
Our revised price estimate for HPE of $18 is about in line with the current market price.
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