Margin Expansion Was Story For Hewlett Packard Enterprise, But Analyst Fears It May Not Be Sustainable

Hewlett Packard Enterprise Co HPE reported stronger margins with earnings beating the Street by a nickel per share, but weaker revenue and questions about the sustainability of margin expansion led Morgan Stanley to warn shares are likely to trade lower in the near term.

The Analyst

Morgan Stanley’s Katy Huberty kept an Equal-Weight stance on the stock with a $17 price target.

The Thesis

It was another strong quarter of margin expansion for Hewlett Packard Enterprise, offsetting revenue shortfalls across the business. But that margin expansion has an asterisk, Huberty said in a note. About half of it may not be sustainable.

About half of gross margin expansion was due to a revenue mix shift to higher value areas, Huberty said. And that’s good. But the other half came from lower commodity prices “which are expected to normalize after a couple more quarters.”

Huberty said HPE management does believe it can continue to drive margin expansion through mix shift and cost efficiencies, like automating service delivery, but she still projects shares will trade between Morgan Stanley’s bear case and base case scenarios in the near-term.

“While HPE's story is cleaner than peers facing both revenue and EPS shortfalls, HPE revenue trajectory limits meaningful multiple expansion,” she wrote in a note.

Price Action

Hewlett Packard Enterprise shares were up 4.1% at $13.47 on Wednesday.

Related Links:

Hewlett Packard Enterprise Higher After Q3 Earnings Beat

A 'Quarter Of Bad News': HP Disappoints On Sales, CEO Departure