I would describe Hewlett Packard Enterprises' (HPE) fiscal third quarter results as just good enough.
They didn't thrill in any way. But they got the job done in a way that didn't damage the stock price. There's a lot to like on the earnings side of things, but the rather tepid revenue growth takes away some of my enthusiasm.
The shares declined 0.1% after market close on Wednesday, even after revenues grew 4% to $7.8 billion in the third fiscal quarter. Adjusted for currencies, revenue increased 1%. Off of those revenues, HPE managed a big boost in operating income. Earnings from continuing operations were $516 million. That's a 516% increase year over year. Net earnings came in at $451 million, representing a 173% increase. That income translated to $0.29 in earnings per diluted share. That's 190% increase over last year's $0.10.
As you can see from the stark contrasts between quarterly earnings, HPE had a pretty darn awful 2017. It explains perfectly why the stock is so cheap.
Since splitting with Hewlett Packard in 2015, we've seen a plethora of ups and downs with the company's annual revenues. Income has followed suit with diminishing gross incomes and inconsistent net incomes. Last year the company reported income of a mere $436 million. 2018 marks a renewed shift into growth, even if the revenue is slow. Looking at Q3 results, it's tempting to grab some shares simply for the earnings growth rates. But what are the actual forecasts for the company? It pays to know when you consider how tumultuous last year was; even with the costs of the separation.
This company is all about Hybrid IT sales. This area of the business includes computing, storage, and networking products. You know all that computer stuff I should have gone to college for?
The company has announced they plan to invest $4 billion into Intelligent Edge services. Think of it as software and services meant to help businesses analyze data to create intelligent information and outcomes. Basically it's everyone's greatest fear. They want to use computers to analyze all of our data to better know how to sell stuff to us. But it's where the money seems to be, so I don't hate the decision. It will tie into cloud services, and everything of the like. Right now, their intelligent edge services provided $785 million in the fiscal third quarter. That's a 10% increase year over year. Clearly it's an area of growth, and prudent investment does seem wise. But that's long term stuff. What about the next few quarters?
HPE's guidance for the fourth quarter suggests GAAP earnings per share of $0.16 to $0.21. Their range for full year GAAP diluted earnings is between $1.85 and $1.90. With that tight range, the stock is currently trading at roughly 9x forward full year earnings. Like I said, this stock is cheap. As a whole, I favor a trading strategy for this one rather than a long term commitment. I only like investing in stocks that have a few years of upward trending revenues and earnings. HPE's just doesn't display the consistency and growth levels that I want to see at this stage. I do however think that there's short term upside based on the how incredibly cheap the stock price is. If one is willing to take the ride, any big surprises in the fiscal fourth quarter could provide quite a boost to the stock because of its low valuation. It's sort of the setup that Macy's (M) had a year ago.
The stock has been on the uptick from its six-month low point. Up roughly 13% from those lows, this stock could keep performing if the fourth quarter finishes on a high note.
I will not be investing in this one myself, but from a financial statement point of view, things do seem to be on the upswing.