On Monday, Citi resumed coverage on HP (NYSE:HPQ) Enterprise (NYSE:HPE) with a Neutral rating and a price target set at $20.00. The firm's analysis suggests that HP Enterprise's strategic move to acquire Juniper Networks (NYSE:JNPR) is a pivot towards a portfolio with higher growth potential and richer margins, particularly in enterprise network offerings.
Post-acquisition, the network segment is expected to contribute over 50% of adjusted operating income, compared to the current 30%.
The acquisition of Juniper Networks is poised to significantly alter HP Enterprise's revenue composition, but Citi anticipates that it will take time for the synergies to fully materialize.
The analyst from Citi noted potential challenges in integrating the offerings of HP Enterprise and Juniper Networks, especially in areas where there is an overlap in WLAN/campus and branch switching products.
Despite these challenges, the valuation of HP Enterprise is deemed not overstretched, with its shares trading at approximately 6 times the enterprise value to earnings before interest, taxes, depreciation, and amortization (Ev/EBITDA) for the next twelve months.
This valuation is in line with the median for the industry. The balanced risk-reward profile at the current price level takes into account several factors, including concerns about potential share loss in the core server and storage markets, which currently account for around 70% of revenue prior to the integration of the acquisition.
Furthermore, while there are concerns about HP Enterprise's free cash flow net income conversion trailing that of its peers, there are also positive aspects to consider.
These include the growth in artificial intelligence revenues, although they lag behind peers, and a continued shift in the company's business model towards GreenLake and as-a-Service (aaS) consumption offerings. This mix shift is anticipated to support the company's financial performance moving forward.
In other recent news, HP Enterprise's third-quarter fiscal year 2024 revenue saw a 10% year-over-year increase, reaching $7.7 billion, with AI system revenues marking a 40% increase from the previous quarter, totaling $1.3 billion. The company has also provided new financial details related to its merger with Juniper Networks. However, the Hybrid Cloud and Intelligent Edge segments saw year-over-year revenue declines of 7% and 23% respectively.
BofA Securities and Loop Capital Markets have made adjustments to the price target for HP Enterprise shares, with BofA upgrading the stock to a Buy rating. Evercore ISI maintained its In-Line rating on HP Enterprise, adjusting its forecast for the accretive value of Juniper to HP Enterprise, now anticipating a ~7% earnings boost in fiscal year 2025.
InvestingPro Insights
As Citi resumes coverage on HP Enterprise with a Neutral rating and a $20.00 price target, InvestingPro insights provide additional context to the company's financial health and market position. HP Enterprise boasts a high shareholder yield, which reflects its commitment to returning value to shareholders. This is further supported by the company's history of maintaining dividend payments for 10 consecutive years, with a current dividend yield of 2.76%.
InvestingPro data shows that HP Enterprise is trading at a low P/E ratio of 13.23, which is appealing when paired with near-term earnings growth expectations. This low P/E ratio is even more attractive considering the adjusted P/E ratio for the last twelve months as of Q3 2024 stands at 11.91, suggesting that the company's earnings are robust relative to its share price. Additionally, HP Enterprise has seen a significant return over the last week, with a 9.95% price total return, highlighting recent investor confidence.
For a deeper dive into HP Enterprise's performance and additional InvestingPro Tips, including the company's valuation implying a strong free cash flow yield and its status as a prominent player in the Technology Hardware, Storage & Peripherals industry, visit https://www.investing.com/pro/HPE. There are 7 more InvestingPro Tips available that can provide investors with a comprehensive understanding of HP Enterprise's potential in the market.
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