While most of the Tech sector has been leading the market throughout the past year, there are some stocks that have definitely not kept pace. That is always true in any sector, not matter what the broad sector momentum looks like, there are always individual companies that will diverge from the normal pattern.
In 2020, the best Tech stocks were tied in one way or another to remote, distance-based networking, cloud, and collaboration solutions. That trend was driven by a forced shift in corporate America away from traditional in-office operations to dispersed, work-at-home solutions due to the ongoing health crisis. That made the companies that were already providing solutions – wide area and virtual private networking, video conferencing, web collaboration, and more – to facilitate distance-driven interactions much bigger pieces of corporate tech budgets than they were before.
In the same vein, companies that focus on the “enterprise” space – where most corporate tech spending has traditionally gone, for products like servers, computers, printers, and the tools to connect them all in a traditional network setting, for example – have struggled to keep up. In fact, even as analysts and experts look to the rest of 2021 and signs that recovery from the health crisis continue, some analysts wonder how much of the work-from-home element of corporate operations will become a permanent part of business life. Even so, there are also signs that some portion of white-collar workers have already begun to shift back to some in-office operations. That could mean that while many of the companies that operate in the Enterprise space could continue to be pressured this year, revenues and earnings are also likely to begin their own recovery.
That brings us to today’s highlight. Hewlett Packard Enterprise Co. (HPE) is a spin off of Hewlett Packard Corporation (HPQ) that is among those companies that underperformed through most of 2020, falling from a pre-pandemic high at around $16.50 at the end of 2019 to a March low at around $7.40. It mostly hovered within a couple of dollars of that low until November, when the stock started picking up a lot of bullish momentum; in fact, from that start point a little above $8 in November, the stock rallied to $12 per share by the end of 2020. Since then, the momentum has accelerated even more, pushing the stock as of this writing off of a peak near its pre-pandemic high at around $16. That marks a strong, intermediate-term upward trend that appears to be bolstered by positive forecasts in the industry along with HPE’s solid fundamental profie and useful value proposition. Does that make HPE a company you should pay attention to? Let’s check it out.
Fundamental and Value Profile
Hewlett Packard Enterprise Company (HPE) is an edge-to-cloud platform-as-a-service company. The Company’s segments include Compute, High Performance Compute & Mission-Critical Systems (HPC & MCS), Storage, Advisory and Professional Services (A & PS), Intelligent Edge, Financial Services (FS), and Corporate Investments. The Compute portfolio offers both general-purpose servers for multi-workload computing and workload-optimized servers. HPC & MCS portfolio offers workload-optimized servers designed to support specific use cases. FS provides investment solutions, such as leasing, financing, information technology (IT) consumption, and utility programs and asset management services, for customers that facilitate technology deployment models and the acquisition of complete IT solutions, including hardware, software and services from HPE and others. Corporate Investments include Hewlett Packard Labs, which is responsible for research and development. HPE has a current market cap of $20.5 billion.
Earnings and Sales Growth: Over the past year, earnings declined about -61.3%, while sales declined by -1.67%. In the last quarter, earnings declined -54%, while sales were -5.2% lower. The company operates with a narrow, but improving margin profile that appears to be emerging from negative status earlier this year; over the last twelve months, Net Income was just -1.61% of Revenues, but increased to 3.26% in the last quarter.
Free Cash Flow: HPE’s Free Cash Flow is modest, at about $560 million. On a Free Cash Flow Yield basis, that translates to 2.66%. Just a few months ago, Free Cash Flow was about $1.2 billion, and started 2020 at $1.7 billion. That decline is a good indication of the kind of pressure the company had to deal with in 2020 as enterprise spending dropped sharply, with corporations deferring many of their expensive technology purchases throughout the year.
Debt to Equity: HPE has a debt/equity ratio of .74, which is a conservative number. Their balance sheet shows $4.2 billion in cash against $11.9 billion in long-term debt. Their balance sheet indicates their operating profits are adequate to service their debt for now; however if Net Income turns back to a negative pattern in the quarters ahead, the company will be forced to rely primarily on its strong liquidity. It is worth noting that at the end of the first quarter of 2020, cash and liquid assets were about $5.1 billion.
Dividend: HPE pays a dividend of $.48 per share, which translates to an annual yield of about 2.99% at the stock’s current price. I think that it is also noteworthy that the company has not cut or reduced their dividend; in fact it remains a bit above the $.44 per share payout they maintained until the beginning of 2020, when management increased the dividend.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $19 per share. That suggests that even with the stock’s current increase, HPE stock is nicely undervalued by about 24%.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above traces the last year of price activity for HPE. The red diagonal line traces the stock’s upward trend from its bear market, March low at around $7.40 to its peak just this week a little above $16. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s increase since November pushed it out of a narrow consolidation range at the bottom of a long-term downward trend, with a strong intermediate-term from that point. Current support is around $14.50, with immediate resistance at $16.50. A break above resistance at $16.50 should offer near-term upside to around $19, based on the distance between prior resistance (current support) and previous support at around $12.
Near-term Keys: The stocks’ current momentum and upward trend is interesting, and if you prefer to focus on short-term trades could be a reason to start looking for a trading signal. A break above $16.50 could offer an opportunity to buy the stock or work with call options, using a target at around $19 as a functional profit target for a bullish trade. A drop below $14.50 might provide a signal to short the stock or buy put options, with $12 acting as a useful near-term target. Despite its current upward strength, I think the best probabilities with HPE actually lie on the long-term, value-based side. This is a company that appears to have weathered the worst that 2020 had to hand out, and that I think will be in good position to lead out in a very crowded and competitive industry.; With a healthy dividend and a nice value proposition, it could offer a patient investor some good opportunities.