Hewlett Packard Enterprise’s Risk-Reward Appealing at Current Levels, According to Bernstein Analyst

By Sam Boughedda

Bernstein has reaffirmed an Outperform rating and a price target of $20 for Hewlett Packard Enterprise (HPE) following the announcement that the company has exercised its option to sell its 49% minority stake in H3C to Unisplendour International Technology Limited.

The analysts detailed that HPE’s engagement with H3C affects its financial performance in two key ways. The sale of the minority stake is valued at 15 times its trailing twelve-month post-tax profit, equating to $3.9 billion. The final sale price is expected to be confirmed within 30 days, with the transaction anticipated to close in 2023.

HPE’s financial impact from this deal includes revenue generated from selling servers and storage to H3C, which are subsequently rebranded and marketed in China. This arrangement provided HPE with total revenues of $848 million in FY 22. Additionally, HPE also recognizes 49% of H3C’s net income in its financials, recorded under "Other Income," amounting to $265 million in FY 22 and $257 million in FY 21.

The analysts noted, "Upon closing, HPE’s commercial arrangement to sell equipment to H3C will remain intact (resulting in no immediate impact on HPE revenues), but HPE’s operating profits and earnings per share (EPS) will likely decrease by about 8% due to the loss of H3C dividends, which may be partially offset by some additional interest income." They suggested that HPE had a unique position in China with its joint venture to sell enterprise equipment, but the unpredictable nature of U.S.-China relations likely influenced HP’s decision to exercise its option.

Despite this, Bernstein believes that the risk-reward profile for HPE at current stock levels remains attractive and sees the decision to exercise the H3C put option as enhancing financial flexibility and future opportunities.

On a related note, Morgan Stanley’s analysts characterized the transaction as a "slight positive" for HPE. While this move effectively removes HPE from its Chinese market opportunity, it nonetheless provides clarity amidst growing investor concern. The firm maintained an Underweight rating and set a $13 price target for the stock.

The analysts further elaborated that while H3C offered HPE a pathway into the China market, the investment had not garnered significant investor confidence due to the uncertainty surrounding the agreement. They concluded that although the timing and amount of cash flow from this transaction remain unclear, the potential for strategic maneuvers could lead investors to view the increased cash availability favorably for HPE in the short term.