IT solutions provider Hewlett Packard Enterprise Co (NYSE: HPE) reported better-than-anticipated fiscal 2018 second-quarter results. The company also posted a GAAP net profit in the April 2018 quarter, compared with a net loss in the similar period last year. The company also issued an impressive 3Q18 earnings outlook and raised the FY18 earnings outlook. Still, the stock lost almost 10% to close Wednesday’s trading session at $15.58. We expect a bounce back in the stock price due to the reasons given below.
The Palo Alto, California-based company reported 2Q18 revenues of $7.47 billion, an increase from $6.81 billion in the corresponding quarter last year. During the quarter ended April 2018, HPE reported a swing to a profit of $778 million, or $0.49 per share, compared with a net loss of $612 million, or $0.37 per share in the prior-year period.
Excluding restructuring charges, amortization of intangible assets, and transformation costs, among others, the Q2 2018 non-GAAP net earnings from continuing operations was $536 million, or $0.34 per share, compared with non-GAAP net earnings of $287 million, or $0.17 per share in the year-ago period. Analysts surveyed by Zacks research had estimated earnings of $0.31 per share on revenues of $7.39 billion.
Segment-wise, Hybrid IT revenues were $6.023 billion in the April quarter of 2018, compared with $5.637 billion last year. Intelligent Edge revenues grew to $710 million, from $606 million last year. Finance services revenues were $916 million, an increase from $872 million in 2Q17.
The company’s gross margin widened 90 basis points on a y-o-y basis to 30.4%. Likewise, HPE’s non-GAAP operating margin grew 270 basis points to 8.6%. The company ended 2Q18 with $6.9 billion in cash and cash equivalents. Long-term debt declined to $9.970 billion at the end of the second-quarter, compared with $10.040 billion reported in the first quarter.
During the recent quarter, Hewlett Packard Enterprise generated $200 million in free cash flow from operations. Additionally, the company returned $1 billion to shareholders in the form of dividends and share purchases ($907 million).
For 3Q18, Hewlett Packard Enterprise expects non-GAAP earnings in the range of $0.35 to $0.39 per share, which is higher than the Zacks Consensus estimate of $0.36 per share. On a GAAP basis, HPE anticipates earnings of between $0.19 per share and $0.23 per share.
The company also raised its FY18 earnings outlook. HPE now expects non-GAAP earnings in the range of $1.40 to $1.50 per share, versus the previous guidance in the range of $1.35 to $1.45 per share. The Zacks Consensus estimate currently stands at $1.40 per share. On a GAAP basis, the company forecasts earnings to be in the range of $1.70 to $1.80 per share, an increase from the prior guidance range of $1.35 to $1.45 per share.
During the conference call, the company’s CEO Antonio Neri stated the company would face a ‘challenging second half’. This triggered a sell-off in the market, despite posting good quarterly results. However, the market is expected to push the stock price upwards in the days to come as both the results and outlook are impressive.
Following the announcement of quarterly results, Morgan Stanley raised the stock’s price target to $21, from $20 issued earlier. Therefore, strong results and an upbeat 3Q18 EPS view are expected to turn the stock bullish in the days ahead.
The historical price chart indicates support for the stock at 15.50 levels. The RSI indicator is near the oversold region, while the MACD indicator is about to cross over the zero level. Therefore, an uptrend is expected in the short-term.
By investing in a call option, we are planning to benefit from the probable appreciation in the share price. We would look for an option contract, which remains active for a period of one week. Furthermore, the option contract may be bought only if the stock is trading near $15.50 in the NYSE.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
