Analysts are remaining positive on Hewlett Packard Enterprises' (HPE) $1 billion free-cash flow pledge amid numerous capital expenditure projects.
"It's one of the most important targets for the company this year," Gabelli & Company research analyst Hendi Susanto told Real Money, explaining his outlook on the $1 billion pledge. "We believe they can achieve or exceed [the target]."
HPE's shares rose 1.2% on Wednesday after posting robust results on Tuesday.
Susanto added that he is not concerned that ongoing programs that require a large degree of capital expenditure will prevent the company from reaching its target.
The company has announced a number capital allocation programs to return money to shareholders that coincide with their timeline for cash flow increases.
This includes a promised $3.5 billion in share buybacks this year, which the company is set to exceed, a 50% increase in the dividend paid to investors, and a stated $4 billion in investments toward the company's "intelligent edge" segment.
Despite these programs, Morgan Stanley (MS) managing director of research Katy Huberty agreed with Susanto, charting an expectation of free cash flow above even management's ambitious targets.
"Management expressed confidence that they can achieve the goal of $1 billion in free cash flow as the company works down inventory levels after strategic pre-purchases of commodities in earlier quarters," she explained. "We model fiscal fourth quarter free cash flow generation of $1 billion, resulting in total yearly free cash flow slightly above management's target."
Confident in the achievability of the pledge and noting working capital as a "tailwind after being a meaningful headwind," Huberty issued an overweight rating and a price target of $21.
To be sure, the company will have work still to do as it is backloading most of its promise to stockpile free cash flow to the back half of the year.
Outgoing CFO Tim Stonesifer noted that the company currently maintains $751 million in free cash flow and has only generated $70 million in free cash flow year to date. However, the executive, who is due to step down in October explained that this is part of business patterns for the technology conglomerate.
"When you look at this business, and you go back the last couple years, [in the first half] we consume a lot of cash and [in the second half we generate a significant amount of cash," he observed when answering analysts questions on the pledge during last night's call. "The profile has been pretty consistent if you go back to prior years."
Stonesifer added that additional details on the company's initiatives to generate free cash flow to position the business for future investments will be provided at a securities analyst meeting to be held later this year.
He concluded that the company's long-term normalized cash flow is actually $2 billion, setting an even higher bar for his successor to meet upon his accession on September 17.
