Yesterday I previewed Hewlett Packard Enterprise’s (HPE) fiscal Q2 results due after the close (read here), and concluded:
My View into the Print: HPE is a cheap stock trading about 8.5x expected 2016 eps of about $1.90 with an expected $50.7 billion in sales. HPE trades .55x expected 2016 sales, vs IBM at a bout 1.8x sales and 11x expected 2016 eps. But the problem near term for HPE is their exposure to businesses which have demonstrated weak demand, as evidenced by Q1 results from Intel, IBM, EMC, JNPR & MSFT for servers and storage. Much of HPE’s services and cloud business is dependent on hardware growth.
Currency will continue to be a big swing factor. With more than 50% of their sales from outside the U.S. the movement of the dollar will have an impact on eps and sales, but since their last guide, the DXY is down about 2.5% which could provide a tailwind for now.
HPE is thought to be the better HP from the spin with their focus on higher growth and margin businesses like software, storage and private clouds, but HPE does not have a ton of traction in public clouds like Amazon’s AWS that is growing so quickly.
CEO Meg Whitman is experienced in shaving costs from the prior combined entity, and has committed to continue to do so with HPE as the company’s operating margins are only high single digits.
I expect a fairly mixed bag when the company reports and guides, but cheap valuation and commitment to capital return (previously guided to using 100% of their free cash flow for cash return in fiscal 2016) should put a floor in the stock in the low teens.
This is not the sort of stock I would short given valuation and given today’s mood towards tech stocks, it would not take much of a guide higher to get the stock up at least in line with the implied move of about 6.5%.
If I were inclined to play from the long side, targeting a move back towards the prior highs I might consider a risk reversal, selling a downside put and buying an upside call. The idea here is to create a band where I get a leveraged move to the upside, while not obligating myself to owning the stock at current levels.
For instance with the stock at $16.25, you could sell the May 27th weekly 15.50 put at 25 cents and buy the May 27th 17 call for 30 cents. The net debit of the trade is 5 cents and offers a break-even on this Friday’s expiration of $17.05. On the downside, the worst case scenario is that you are put 100 shares per 1 contract sold short at $15.50 with losses below. This trade has about 60 deltas and could serve as a decent long stock alternative for those looking to play earnings from the long side.
Playing earnings events is not exactly my cup of tea, but I prefer this to buying stock for the event at $16.25.