JP Morgan Weighs In On The New Hewlett-Packard

• Hewlett Packard Enterprise Co HPE shares have lost 19 percent since October 26, while HP Inc HPQ shares are up by the same figure.
• JP Morgan’s Rod Hall maintained Neutral ratings on both the companies.
• Hall said that there was a cautious stance on the FQ4'15 results of both companies, one on account of enterprise IT spending weakness and the other due to persisting PC uncertainty.

Hewlett Packard Enterprise: Impacted By Enterprise Weakness

Analyst Rod Hall mentioned that there were “multiple negative data points” both on the macro environment and enterprise IT spending. Several companies have indicated decelerating enterprise spending through Q3, and that a part of this slowdown has been occurring in the US. “We believe this represents a risk factor heading into HPE’s earnings report later today,” Hall wrote.

In October, Hewlett Packard Enterprise shifted its focus away from Public Cloud and towards its private and hybrid cloud offerings. Hall believes this is a positive move for the company, in view of the stiff competition in the public cloud space and the strong position of AWS.

The analyst added, however, that there was little evidence so far to suggest that Hewlett Packard Enterprise would be able to “successfully and meaningfully monetize the private cloud market.”

In the report JP Morgan noted, “A successful turnaround in Enterprise Services would represent upside to our numbers, but large ongoing headcount reductions while offshoring capacity represents material execution risk, in our opinion.”

With large tech deals ongoing, there is a low probability of Hewlett Packard Enterprise becoming a takeover target.

The estimates for FQ4 stand at: total revenue of $13.610bn, gross margin of 27.7 percent, opex of $2.654bn, EBIT margin of 8.2 percent and EPS of $0.46.

HP Inc: Impacted By PC Uncertainty

While PC weakness continues, the strong USD does not help HP’s Printing business, Hall commented.

“While we note that the Windows 10 and Skylake upgrade cycles could act as a tailwind, we would like to see evidence of stabilization before we get constructive on the sector,” the analyst said, while adding that the estimate of a 2 percent Y/Y decline in 2016 shipments could prove to be “slightly optimistic.”

The JP Morgan report noted that the strong USD had adversely impacted the Printing business. “Until the USD/yen differential corrects itself, we would expect this competitive pressure to continue for HPQ.”

The estimates for FQ4 stand at: total revenue of $12.516bn, gross margin of 19.2 percent, opex of $1.227bn, EBIT margin of 9.4 percent and EPS of $0.47.