Is HPE’s bear market collapse a buying opportunity?

The Tech sector has enjoyed the lion’s share of attention among all segments of the economy for a number of years. That’s been a good thing during bull markets, but it also means the sector really gets pummeled when uncertainty increases.

Since 2020, that attention – driven in no small part by the role of cloud-based and remote networking solution providers –  motivated investors to buy Tech stocks enthusiastically. The flip side of that attention has reared its ugly head this year, as higher interest rates, war in Ukraine, and continued supply chain constraints that started with technology have rippled into multiple segments of the economy. A lot of Tech companies have seen their stock prices plunge this year into their own bear market levels. Again, Tech is leading the way in the stock market, as the entire market has done the same in the last month.

Since early 2020, 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 with demand for remote workforce solutions and cloud-based services. While I think that much of the work-from-home element of corporate operations will become a permanent part of business life, there are also signs that for many businesses, back-in-office is becoming an increasing expectation. My research into many of these companies suggests that while many of the companies that operate in the Enterprise space will continue to be pressured for the time being, revenues and earnings in many cases have also begun their own recovery. Current geopolitical, economic and market conditions haven’t entirely been reflected in some of those metrics as of yet, which implies that how elements play into the fortunes of companies in the Tech sector for the rest of this year is a risk element that could act as a longer-term headwind to economic health and growth.

That brings us to today’s highlight. Hewlett Packard Enterprise Co. (HPE) is a spin off of Hewlett Packard Corporation (HPQ), and a business that is among those companies that underperformed through most of 2020 but saw strength beginning in September of last year, rising from a low at around $13 to a February 2022 peak at nearly $18. From that point, broader market fears have pushed the stock into a new downward trend that recently established a new low at around $13.50 this week. This is a company that has seen some material improvements in its fundamental strength and its value proposition since the end of 2021. Have those improvements held up so far in 2022’s difficult economic environment? If they have, HPE could be a good stock to think about using for a functional, value-based investment right now.

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 $17.8 billion.

Earnings and Sales Growth: Over the past year, earnings growth was flat, at exactly 0%, while sales saw a marginal, 0.19% increase. In the last quarter, earnings we were about -51.3% lower, while sales also declined by -3.56%. The company operated with a  narrow margin profile through 2020 that saw big improvements in 2021, but is showing signs of deterioration in the last quarter; over the last twelve months, Net Income was 13.28% of Revenues, and declined sharply to 3.72% in the last quarter. This is a big red flag that bears watching in the quarters ahead.

Free Cash Flow: HPE’s Free Cash Flow is healthy, at more than $2.0 billion. On a Free Cash Flow Yield basis, that translates to 11.23%. A year ago, Free Cash Flow was $1.6 billion, but it should be noted that at its peak nine months ago, Free Cash Flow was $3.7 billion. The decline since that high point adds weight to the warning signal we see from the company’s Net Income pattern.

Debt to Equity: HPE has a debt/equity ratio of .43, which is a conservative number. Their balance sheet shows about $3 billion in cash against a little less than $8.9 billion in long-term debt. Their operating profits are adequate to service their debt, with health financial flexibility as well, however the latest quarter’s declines in Net Income and Free Cash Flow could act as drags on the company’s liquidity. It should be noted that in the first quarter of this year, long-term debt was around $10.3 billion, meaning that the company has eliminated $1.4 billion of long-term debt from their balance in that period.

Dividend: HPE pays a dividend of $.48 per share, which translates to an annual yield of about 3.5% 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 to its current level.

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 $18.20 per share. That suggests that HPE’s stock is undervalued, with about 33% upside from its current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above displays the last year of price activity for HPE. The red diagonal line traces the stock’s upward trend from a low point in September 2021 at around $13 to its peak in February a little below $18. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s downward trend from that high is clear, with the stock most recently hitting the 88.6% retracement level at around $13.50. Bearish momentum has really picked up since mid-May, with current support now at $13.50 and immediate resistance at around $15 where the 61.8% retracement line sits. A push above $15 should see limited upside to next resistance at around $16, but if buying activity increases around that level, the stock could revisit its 52-week high at around $18. A drop below $13.50 also has limited downside, with the stock’s 52-week low at around $12.90 not far away; but if selling activity accelerates, the stock could drop close to the $12 level before finding new support.

Near-term Keys: HPE has been following the rest of the Tech sector lower over the last couple of months. The stock’s recent drop suggest that betting on continued downside could be low-probability, low-reward bet, with the stock already close to its 52-week low. That makes betting on a bearish trade, either by shorting the stock or buying put options is a very speculative trade. A bounce off of current support could be a short-term, bullish trading opportunity to think about buying the stock or working with call options, with $15 acting as a good, quick profit target, and $16 in the event that buying momentum accelerates. The stock’s value proposition, in the meantime, is very attractive, however I do see the last quarter’s declines in Free Cash Flow and Net Income as red flags to pay attention to and that could be signs of increasing difficulties ahead. Those issues could also be somewhat cyclical concerns, driven by sector-wide supply disruptions. If you’re willing to be patient, the stock could offer an interesting, value-based opportunity, however in the near-term the stock could continue to see high levels of volatility.