Hewlett Packard Enterprise Company (HPE) The Henry Fund Stock Rating

The Henry Fund
Henry B. Tippie School of Management
Gaurav Ghantkar [[email protected]]
March 09, 2016
Hewlett Packard Enterprise Company (HPE)
Investment Thesis
Hewlett Packard Enterprise is a leader in providing end-to-end enterprise
solutions. It came into existence on 1 November 2015 as a spin-off from the
parent HPQ. Our valuation models indicate that the stock is undervalued and
we believe that the market has not correctly factored in its value. We have
assigned a BUY rating.
Drivers of Thesis
 Strong Servers and Storage Revenue Expectations: A leaner organization
focused on core competencies of network storage and servers, coupled
with an exit from loss leading services such as public cloud product, Helion,
will spur revenue growth. We expect Servers and Storage revenue to grow
2.71% and 3.19% respectively in 2016.
 Strategic Acquisitions: Key strategic acquisition such as that of Aruba has
added to the portfolio of offerings and is in line with HPE’s core products.
We expect the synergy to draw in strong revenues in the foreseeable
future. We estimate a healthy revenue growth at 3.19% in 2016 and the
growth to pick up thereafter.
 Returning Value to Stockholders: Emphasis on returning value to
stockholders. Management has recently announced a quarterly dividend of
5.5 cents per share. Further a $3 billion stock buyback is in line without a
particular expiration date.
 Research and Development culture: A strong culture of innovation backed
up by a significant investment in R&D to the tune of $2.3 in fiscal 2015, $2.2
in 2014, and $2.0 in 2013.
Risks to Thesis
 Currency Headwinds: Currency pressure will remain a headwind as 61% of
revenues come from outside US and hence HPE is susceptible to foreign
currency fluctuations
 Fed Funds Rate: An increase in fed funds rate will increase borrowing costs
and put a downward pressure on demand for enterprise service products
and solutions.
Earnings Estimates
Year
EPS
growth
2013
$1.18
113.89%
2014
$0.95
-19.65%
2015
$1.36
43.80%
30%
2016E
$1.69
24.26%
2017E
$1.83
8.28%
2018E
$1.98
8.19%
Source:Yahoo
20%
15%
10%
5%
0%
-5%
-10%
N
D
HPE
$20.76-$23.90
$20.76
$14.79
$22.25
$15.68
$11.63 – 18.50
$16.07
$23.58
1742
37.8%
1.65
1.68%
0.7%
11.66
08.00
0.52
0.76
6.21%
4.75%
3.36%
7.00%
Industry
Sector
25
20
15
10
Source:
Factset
23.8
15.6
17.6
15.7
13.3
11.0
7.3
7.0
4.5
0
P/E
ROE
EV/EBITDA
Company Description
S&P 500
25%
O
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple
Price Data
Current Price
52wk Range
Consensus 1yr Target
Key Statistics
Market Cap (B)
Shares Outstanding (M)
Institutional Ownership
Five Year Beta
Dividend Yield
Est. 5yr Growth
Price/Earnings (TTM)
Price/Earnings (FY1)
Price/Sales (TTM)
Price/Book (mkt)
Profitability
Operating Margin
Profit Margin
Return on Assets (TTM)
Return on Equity (TTM)
5
6 Month Performance
HPE
Buy
Stock Rating
Information Technology – Enterprise Solutions
J
Hewlett Packard Enterprise Company provides
total enterprise solutions spanning areas ranging
from Servers, Storage, Networking, Information
Technology Software and Services to customized
Financing Solutions. The company is organized
into 5 segments namely Enterprise Group,
Software, Enterprise Services, Financial Services
and Corporate Investments. Hewlett Packard
Enterprise was spun off from HP Inc., the parent
company on November 1, 2015.
F
Important disclosures appear on the last page of this report.
EXECUTIVE SUMMARY
COMPANY DESCRIPTION
Hewlett Packard Enterprise (HPE) provides total enterprise
solutions. They are a major player in the storage industry
and are the closest competitor to Cisco in the Networking
solutions domain. The recent spin-off of HPE from the
parent has brought about a greater clarity of the business.
Further, by exiting from loss leaders such as public cloud,
the management has put significant efforts to bring in a
more conservative, leaner and disciplined strategy that is
aligned with HPE’s core competencies of storage, servers,
networking and hybrid cloud services.
Hewlett Packard Enterprise Co. is the provider of
technology solutions customers need to optimize their
traditional information technology while helping them
build the secure, cloud-enabled, mobile-ready future that
is suited to their needs. It offers servers, storage,
networking, converged systems, software and services,
combined with its financing solutions. Hewlett Packard
Enterprise was founded on November 1, 2015 and is
headquartered in Palo Alto, CA. 9
A key strategic decision by HPE has been its partnership
with Microsoft in the public cloud domain. By partnering
with a flagship Microsoft product such as Azure, the motto
of HPE has been “If you cannot beat them join them.”
Further the acquisition of Aruba for $3B in May 2015 has
added to its portfolio of offerings in the mobile WLAN
space.
While M&A has been a part of HPE, there has been
significant talk by the CEO, Meg Whitman, about organic
growth and investment in R&D, necessary to add value to
the organization.
We estimate Enterprise Group and Software segment to
grow at 2.96% and 3.49% in 2016 and 2017 respectively.
Enterprise Group that caters to the core products of HPE is
likely to see strong sales due to its niche products and also
due to the sales of Aruba products post its acquisition by
HPE. We expect the negative growth trends to continue for
Enterprise services and Financial Services segment and
expect the segments to contract at -5.46% and -5.46% in
2016. Our projections indicate that the cumulative
negative top line growth of recent years to continue into
2016 at a growth rate of -0.66%, while we expect year
2017 to set HPE on the path of a healthy fiscal recovery at
a growth rate of 0.41% and the growth to pick up
thereafter.
We believe the intrinsic stock value is most closely
approximated by the DCF valuation, which presents a
value of $21.52, as it most closely captures the revenue
decomposition and growth forecasts of the different
segments of business. The stock currently trades for
around $15.68 and thus we estimate an upside of 37% that
can be captured in the long run. We believe this is a value
stock and hence we have given a BUY rating to the stock.
Geography
HPE has a large geographical presence across the world,
coupled with a third of their revenues coming from the
domestic market. They are strongly established in UK and
Germany in Europe, while Japan, China and India are
strong revenue contributors in Asia. The strong overseas
presence makes HPE susceptible to foreign currency
fluctuations. However, HPE uses forwards, swaps and
options to hedge against currency risk. The strengthening
dollar in recent months has hampered the exports of HPE
products and are thus constant currency adjusted for the
purpose of analysis. A breakup of their revenue can be
seen below:
Revenue Breakdown
33%
39%
3%
4% 11%
10%
United States
China
UK
Japan
Germany
Other
Source: FactSet
Segments
The major segments of HPE are Enterprise Group and
Enterprise Services that together account for 88% of the
revenue. These division also hone the best products of HPE
and are the core revenue generators.
Page 2
enterprises that are hesitant to trust all their data to public
cloud due to security concerns. The downside of this is
their inability to capitalize on the public cloud storage
market, an area in which we are seeing increasing industry
trends to capture the market space by the bigger players
in the industry.
REVENUE BY SEGMENT
Enterprise Group
Enterprise Services
6%
36%
Software
Other
6%
We estimate server segment to grow at 2.71%, 2.56% and
1.26% in 2016, 2017 and 2018 respectively and believe
HPE will follow the industry growth trends in the server
market as seen below:
52%
Source: FactSet
HPE caters to five divisions as follows:
Enterprise Group
This segment provides a broad range of technology
solutions such as Servers, Storage, Networking and
Technology Services. This segment accounts for 53% of the
revenue. We estimate that this segment will show a
growth of 2.2%, 2.22% and 1.71% in 2015, 2016 and 2017
respectively. The split for the individual sub-segments are
discussed below. The growth forecasts are in line with
industry forecasts. While, this segment hones some of the
best and premium products of HPE, the pricing power of
the rivals have put a downward pressure on the products.
Hence we make use of modest growth forecasts as
mentioned above.
HP Servers
HPE Servers offers both Industry Standard Servers ("ISS")
as well as Business Critical Systems ("BCS") to address the
full array of customers' compute needs. These servers
typically run Windows, Linux and virtualization platforms
while leveraging x86 processors. 1
HPE is likely to take a hit in the public cloud computing
services segment, in which they had competed directly
with Amazon, Microsoft. By announcing the closure of
their flagship public cloud product HPE Helion in Jan 2016,
HPE has chosen to focus more on their core competency
and do what they do best, i.e. traditional storage devices.
Further enterprises are choosing a combination of public
cloud and traditional storage- a term that is referred to as
hybrid cloud. By partnering with public cloud players such
as Amazon and Microsoft, HPE is perfectly positioned to
capture value in the hybrid cloud market and cater to
Source: Statista
Storage
This section caters to small and medium size enterprises.
The flagship HPE product in this area is the 3 PAR.
StoreServ Storage Platform, which is designed for
virtualization, cloud and IT-as-a-service. Traditional
Storage solutions include tape, storage networking and
legacy external disk products such as EVA and XP 1
We estimate the storage sub-segment to grow at 3.19% in
2016 and the growth to pick up thereafter at 3.53% and
4.05% in 2017 and 2018 respectively.
Networking
This sections includes include switches, routers, wireless
local area network ("WLAN") and network management
products that deliver open, scalable, secure, agile and
consistent solutions. 1
By acquiring Aruba Networks, an industry leader in
wireless networking (WLAN), for $3 billion in Mar 2015,
Page 3
HPE has chosen to enter the enterprise mobility market.
The acquisition has been financed by cash and debt. The
synergies resulting from this acquisition has perfectly
positioned HPE to capture the IT mobility market. This
acquisition, we believe, is a defining moment for HPE as
the two companies cater to a complementary set of
products and the consolidation of the two has resulted in
propelling HPE to the position of market leaders in the
space.
Market Leadership Chart
Datacenter Care that caters to hybrid cloud environments;
Lifecycle Event Services that offer expertise on each phase
of technology lifecycle 1
Software
This segment provides big data analytics and applications,
enterprise security, application testing and delivery
management and IT operations management solutions for
businesses and other enterprises of all sizes. The software
offerings includes licenses, support, and professional
services 1
This segment contributed to 7% of the top line in 2015,
thus contributing modestly to the total revenue. While the
segment does not cater to the core competency of HPE, it
is instrumental nonetheless in the branding of HPE as a
total enterprise solution. The segment has shown a
decreasing trend in 2014 and 2015 dropping by a margin
of 2.53% and 7.91% respectively. However, we believe the
sales in this segment will pick up in foreseeable future and
the segment growth will match the industry average of
3.49% in 2016.
Source: Gartner
Historically Aruba has posted a compounded annual
growth rate of 30 percent for five years prior to the
acquisition. In 2014, it reported a revenue of $729 million.
(25)
Thus it contributes to roughly 25 percent of the
networking revenues. Post the acquisition, we estimate
the networking sub-segment to grow at 3.19%, 3.53% and
4.05% in 2016, 2017 and 2018 respectively as we expect
healthy sales of Aruba products to contribute to the
Networking Revenue.
Technology Services
This section provides Support and Consulting Services. The
services offered are HPE Foundation Care that caters to
hardware and software support services; HPE Proactive
Care that provides access to technical experts; HPE
Source: Statista 4
Big data
This section helps organizations capture, store, explore,
analyze, protect and share information. 1
Application Delivery Management
This section provides software that help organizations
deliver high performance applications. 1
Page 4
Enterprise Security
This is designed to disrupt fraud, hackers and cyber
criminals by testing and scanning software and websites
for security vulnerabilities, improving network defenses
and security, and implementing security controls 1
IT operations management
This section provides the software required to automate
routine IT tasks and to pinpoint IT problems as they occur1
Enterprise Services
ES provides technology consulting, outsourcing and
support services across infrastructure, applications and
business process domains in traditional and Strategic
Enterprise Service offerings which includes analytics and
data management, security and cloud services 1
Infrastructure Technology Outsourcing
This section helps optimize clients’ technology
infrastructure and encompasses the management of data
centers, IT security, cloud computing, workplace
technology, networks, unified communications. 1
The segment saw demand weakening in 2015, dropping by
a whopping 13%. We expect the negative trend to trickle
into the coming few years and hence we have negative
projections for this segment till 2020. We see a time
horizon of 2020 when the segment will show modest
growth of 0.7%.
Application and Business Services
This section caters to traditional IT services including
application development, maintenance, testing and
integration for both custom and packaged solutions.
The sub-segment witnessed decreasing trend in 2014 and
2015, dropping by 8 percent in 2015. However we expect
this sub-segment to grow by industry averages of 3.49%,
3.34% and 3.39% in 2016, 2017 and 2018 respectively.
Financial Services
This segment is designed to help provides flexible
investment solutions for the customers—such as leasing,
financing, IT consumption and utility programs—and asset
management services1. This spans areas including
hardware, software and IT solutions.
The segment tries to meet the investment demands of
corporations in order to fund their purchase of HPE
products. The segment saw a drop of 8 percent in 2015.
We expect this negative growth trend to continue in the
foreseeable future. Hence we estimate a negative growth
of 5.46%, 2.86% and 0.26% in 2016, 2017 and 2018
respectively. Further, we expect a positive growth in year
2019 and 2020. We have incorporated these growth
forecasts in our model.
Corporate Investments
This segment includes the research and developments labs
and are the source of HPE’s innovative and flagship
products. This division is crucial for HPE to retain its
differentiation and product leadership. The R&D expenses
over the past few years have been a healthy 2 billion.
We have grown this segment using the historical trends
and estimate a growth of 12.5 percent Compounded
Annual Growth Rate till 2020.
RECENT DEVELOPMENTS
FY 2016 Q1 Results
On 3rd March 2016 HPE posted adjusted fiscal first-quarter
earnings of 41 cents per share on $12.72 billion in revenue.
Analysts had expected HPE to report earnings of about 40
cents a share on $12.68 billion in revenue, according to a
consensus estimate. On a constant currency basis, firstquarter revenue increased 4 percent from the year-earlier
period, but it fell about 3 percent without accounting for
shifts in the U.S. dollar (14). $1.3 B has been returned to
shareholders in the form of share repurchases and
dividends. (32)
The results saw Enterprise Group and Financial Services
segment showing a positive revenue growth of 7% (1% Y/Y
unadjusted) and 3%(-3% Y/Y unadjusted) on a constant
currency basis.
The strong performance by Enterprise group was primarily
due to its sales from the Networking sub segment that saw
a whopping 54 percent year on year increase. The increase
was partially offset by Servers, Storage and Technology
Services sub-segment showing a drop of 1%, 3% and 9%
Y/Y respectively.
Page 5
Enterprise services did not show any change in revenue (6% Y/Y unadjusted) on a constant currency basis. The
Infrastructure Technology Outsourcing and Application
and Business Services sub-segment saw a drop of 8% and
3% Y/Y respectively.
dividend of $0.22, $.24, $.26 in 2016, 2017 and 2018
respectively.
The software segment showed a negative growth of 6
percent on a constant currency basis (-10% Y/Y
unadjusted).
In May 2015, HPE completed the acquisition of Aruba for
$3B in a cash and debt deal. This translates to a value of
$24.67 per share. Aruba is a leader in providing next
generation access solutions for Mobile Enterprise. It
provides mobile networks to hospitals, malls, universities
and corporations. Aruba Networks has been imbibed into
the Networking segment of HPE.
Below chart summarizes the above facts.
Segment
Enterprise
Group
Enterprise
Services
Software
Financial
Services
Total HPE
Q1 Net
Revenue
Growth
Y/Y %
CC
Growth
Y/Y %
NonGAAP Op
$
$7051M
1.00%
7.00%
$944M
$4688M
-6.00%
0.00%
$238M
$780M
-10.00%
-6.00%
$136M
$776M
-3.00%
3.00%
$100M
$12.72B
-3%
4%
Acquisitions
Aruba Networks
In connection with this acquisition, the Company recorded
approximately $1.8 billion of goodwill, $643 million of
intangible assets and $153 million of in-process research
and development. (1)
Aruba generated revenues of $729 million in 2014. The
company reported a compounded annual growth rate of
30 percent for the five years prior to the acquisition. (25)
$1029M
Source: HPE Press Release
The investors saw the quarterly results cues positively and
were cheery about HPE’s outlook and its stated
commitment to return cash to shareholders. The shares
rallied 15% on Friday, 4th March. The earnings also signaled
a third consecutive quarter of top line growth on a
constant currency basis. The press release also spoke of its
commitment of returning 100% of FCF to shareholders.
We expect the acquisition of Aruba to propel HPE to a
position of market leader (as seen in the Statista forecast)
and is likely to give a tough competition to CISCO in the
Wireless LAN space, who are the leaders in this segment.
As can be seen in below chart the HP/Aruba combined
revenue stood at a close second position behind CISCO,
who are the market leaders. Further, we expect this gap
between CISCO and HPE to narrow down in the
foreseeable future.
Q1 Dividend Declaration
Post the spin-off on Nov 2015, HPE has announced its first
cash dividend of 5.5 cents per share per quarter. The
dividends were payable as of Jan 6 2016. The payment of
dividends sent a positive signal to investors and the stock
rose around 5.5% on Jan 6, until the market corrected.
We view this modest dividend declaration as a strong
indicator by the CEO Whitman to investors, and this signals
a stability post its independence as a company from the
parent.
We expect the company to maintain the current payout
ratio of 12.99% moving forward and expect a yearly
Source: Statista
Page 6
We estimate Aruba to grow by 30% with the overall
Networking segment growing at 10.63% in 2016 . Further
HPE’s decision to retain the core Aruba management
team, which has till date been successful in steering the
company, is a positive. Aruba will seek to realize the
synergetic benefits of fatter cash balance of HPE and its
successful presence across various geographies.
Let us understand the rationale behind the acquisition and
the synergetic benefits that can be realized through the
acquisition. HPE is like to benefit from the below factors:
Trilead
For an undisclosed sum of money, HPE acquired Trilead, a
Switzerland based firm focused on backup and recovery of
virtual machines, in 2016.
We believe this investment is in line with HPE’s strategy of
building on their core competency. However due to the
undisclosed sum involved in this deal, we believe this is a
very small addition to HPE and is unlikely to make a
significant impact to the top line.
Niche Wireless Technology: HPE will have access to some
of the best wireless technology and products in the
industry. Aruba has a strong presence in the 802.11 ac
wireless technology category and thus is able to set up WiFi networks in organizations with ease.
Partnership with Tsinghua Holdings
Air-Heads Community: Aruba has an active community
comprising thousands of engineers, customers and
partners involved in online discussions. The community
has a strong brand loyalty and meets yearly through an
event titled Atmosphere. Through a system of discussions,
requests and feedback, Aruba is able to improvise on its
products and features.
The deal will result in a new business called H3C. Under the
terms of the agreement, Tsinghua's subsidiary,
Unisplendour Corp., will purchase a 51 percent stake in the
new company for roughly $2.3 billion.H3C will become a
subsidiary of Unisplendour of Tsinghua, which acts as the
asset management arm of the Tsinghua University in
China. (16)
High Top Line Growth: Prior to the acquisition, the
company has been able to achieve a Compounded Annual
Growth Rate of around 30% Year on year. The revenues
stood at $729 million in 2014. We expect the increasing
trend to continue in the foreseeable future.
HPE hopes to capitalize on the colossal Chinese market
through this partnership and hopes to use this platform to
reduce Chinese skepticism for fully owned foreign
companies. Through the partnership and by giving a
majority stake to Chinese investors, HPE hopes to lead in
networking solutions, while being market leaders in
servers, storage and technology services. Further, the deal
is expected to enhance the R&D activities of HPE and add
to its portfolio of offerings. The deal is yet to close. The
deal was recently approved by China Security Regulatory
Commission (CSRC) and is likely to be completed by May
2016 after completing final administrative processes and
regulatory approvals.
Aruba is likely to benefit from the following factors:
Global Presence: The strong geographical presence of HPE
can provide Aruba with access to new markets and points
of sales, adding to the revenue growth of Aruba. We have
incorporated this aspect into our growth forecasts.
Capital: Further Aruba can benefit from the increased
liquidity of HPE as the company can provide the necessary
cash in order to expand into newer avenues of business
and for Research and Development of new products. HPE
had cash and cash equivalents totaling to $9.8B in 2015
and we forecast an increasing trend in the cash reserves in
the foreseeable future.
Relationships: HPE currently has relations with more than
half of the Fortune 1000 companies. Aruba is likely to
benefit from these relationships as this will give them
access to an additional channel of potential customers.
In May 2015 HP, the parent company of HPE sold 51% of
stake in its Chinese networking business to Tsinghua
Holdings.
We expect this deal to provide significant liquidity to HPE’s
China operations and help it expand its footprint in the
massive Chinese market. We expect the deal to contribute
significantly to the top line growth when the deal is
finalized.
Selling of Tipping Point Business
In October 2015, the Company signed a definitive
agreement with Trend Micro International to sell the
Tipping Point business for approximately $300 million.
Page 7
Tipping Point is a provider of next-generation intrusion
prevention systems and related network security
solutions. The revenues generated from the Tipping Point
business are included in the Software segment. 1
choice to pursue such solutions and exiting Public Cloud
Services. As we see in the chart (this was slightly prior to
the split), the major players in this space are EMC, Cisco,
HPE and Net App.
This sell-off is in line with HPE’s philosophy of restructuring
and a business focused on its core competencies. The deal
however is meager in size to impact the top line. We
expect the growth forecast for the Software segment to be
unaffected by this decision.
Market Leadership Chart
INDUSTRY TRENDS
Hybrid Cloud
HPE competes in various segments. One of the segment
they compete is in the Hybrid Cloud. Hybrid cloud refers to
the use of private cloud and third party public cloud
services. The rationale behind choosing a combination of
the two is that enterprises are often skeptical to trust their
critical data to public storage services. So they opt for a mix
that allows them to host their critical data on private
cloud, while less critical data can be hosted on public cloud
platform, thus effectively lowering the storage costs of the
enterprise.
Increasingly, organizations, especially startups and small
caps are moving towards hybrid cloud in order to lower
their initial capital expenditures.
Source: Gartner
MARKETS AND COMPETITION
Hyper Converged Infrastructure
Hyper-convergence is an infrastructure system that
utilizes software-centric architecture that tightly
integrates compute, storage, networking, virtualization
resources and other technologies into a single product by
a single vendor. (18)
Enterprises are increasingly seeking storage, server and
networking solutions that require lesser space, have faster
speeds and have better computational power. Hyperconverged infrastructure fits into this scheme of things
and delivers data center solutions in a single entity. The
compact size, scalability, faster deployment times,
improved operational efficiency, and reduction in costs of
such solutions make it an attractive proposition for
enterprises. The adoption of these products are in their
infancy but are expected to rise in coming months.
Hyper-converged infrastructure is an alternative to public
cloud services. Here we see another rationale for HPE’s
Peer Comparisons
HPE competes in different segments with major players in
the industry. Let us dissect the market and competition
from a segment viewpoint. Here we will discuss Enterprise
Group and Enterprise Services segment only, as the other
segments have competitors that overlap with the previous
two and are smaller contributors to the top line.
HPE’s main competitors in the Enterprise Group segment
are IBM, EMC, and Dell in the storage and servers niche,
while Cisco is the main competitor in the networking
space. We believe HPE has a head start over Dell due to
the uncertainty surrounding the conclusion of Dell
acquisition of EMC. Further the leaner model of HPE along
with a focus on total enterprise solutions is an attractive
incentive to incumbent clients of Dell who are hesitant to
further their relationship with them. In the long run,
however, we see trends of industry consolidation that may
Page 8
put a significant downward pressure on HPE product
pricing. IBM is a colossal player in this segment and, like
HPE, provides total enterprise solutions. The bigger brand
recognition of IBM has made it a top solution provider to
a more exhaustive client base than those that HPE cater
to. Further, IBM has made significant acquisitions in the
public cloud space, an area that HPE has recently exited
from. However, by partnering with major public cloud
service providers such as Microsoft, HPE have been able to
compete with IBM majorly by narrowing their profitability
margins. HPE is less debt financed as compared to IBM,
which decreases the cost of capital and hence risk. HPE has
a lower debt/equity ratio as compared to industry
averages, thus is less leveraged and less risker as
compared to its peers. IBM is heavily debt financed as can
be seen in below chart.
HPE
EMC Corp
Western Digital
Seagate
NetApp
IBM
Cisco
VMWare
Average
CSC
Wipro
Average
EMC Corp
Western
Digital
Seagate
NetApp
IBM
Cisco
VMWare
Average
CSC
Wipro
Infosys
Average
Annual
Revenue(M)
P/E
23.56
51831
10.99
51
24750
25.43
11.33
14572
13.09
10.3
13739
9.15
7.62
6108
20.64
133.68
81741
10.16
135.21
49161
16.23
20.86
49.20
4.2
19.74
40
21.88
6647
31068.63
12173
7663
8702
20092.25
24.18
16.23
11.66
23.15
19.86
16.41
Source: FactSet
Leverage Ratios
Company
Company
HPE
Market
Cap(B)
D/E
Debt to Capital
47.10
32.02
32.04
27.84
137.67
36.20
279.70
42.47
18.94
77.75
24.27
21.78
57.93
26.31
73.66
29.81
15.93
35.21
91.37
19.34
52.60
47.75
16.21
31.99
HPE trades for lower Price to Earnings ratio as compared
to its peers in the Enterprise Group and Enterprise Services
segment. We see the stock as being undervalued and
hence we recommend a BUY.
HPE has modest liquidity ratios that are slightly trailing
below industry averages. Especially the cash ratio is
significantly lower than industry average. A plausible
explanation for this might be that the spin-off and the
restructuring might have necessitated the usage of funds
for setting up one-time events such as new accounting or
HR departments.
Liquidity Ratios
Source: FactSet
In the networking space the recent acquisition of Aruba
has propelled HPE to the closest rival of Cisco, who is the
leader in the industry. HPE has sought to benefit from the
goodwill and brand recognition of Aruba, while Aruba will
benefit from the geographical presence and liquidity of
HPE.
In the Enterprise services segment the primary
competitors of HPE are Computer Science Corporation and
Indian multinationals such as Infosys, and Wipro. HPE has
EPS in line with the industry average in this segment and
the companies here compete solely on price and quality.
Company
HPE
EMC Corp
Western Digital
Seagate
NetApp
IBM
Cisco
VMWare
Average
CSC
Wipro
Infosys
Average
Source: Fact Set
Page 9
Current
Ratio
Quick
Ratio
Cash
Ratio
1.41
1.31
0.44
1.17
2.63
2.38
2.50
1.24
3.23
2.27
2.10
1.07
2.21
1.95
2.45
1.20
3.16
2.27
1.95
0.72
1.63
1.06
1.97
0.24
2.56
1.82
1.31
1.36
2.66
3.05
2.12
1.36
2.62
3.05
2.09
0.58
1.56
2.09
1.17
The Profitability Ratios indicate that HPE have some of the
lowest ratios in the industry. The rationale behind the low
gross margin and net margin is that the pricing pressure of
the bigger players in the industry has forced HPE to
compete on costs and thus trim their margins. The lower
return on equity is due to the slim margins and also due to
the restructuring charges that has lowered the net income.
The downside of HPE is its inability to extract value from
every dollar of its asset, thus having lower ROA then its
peers.
EV/EBIDTA Multiple- EG Segment
12
10
8
6
4
2
0
Profitabilty Ratios-EG
120
100
80
60
40
20
0
Source: FactSet
EV/EBIDTA Multiple-ES Segment
35
30
25
20
15
10
ROE
ROA
Gross Margin
5
Net Margin
0
HPE
Source: FactSet
CSC
Wipro
Infosys
Average
Source: FactSet
Profitability Ratios-ES Segment
ECONOMIC OUTLOOK
35
30
25
20
15
10
5
0
Economic drivers for HPE are GDP growth (US, China, UK
and Global), fed funds rate, and strength of US dollar.
Interest Rates
HPE
ROE
CSC
ROA
Wipro
Gross Margin
Infosys
Average
Net Margin
Source: FactSet
The lower margins have resulted in HPE being traded at
relatively lower multiples as compared to its peers. While
analyzing the EV/EBIDTA multiple we notice that HPE
trades at significantly lower multiple as compared to
industry averages. We expect the EV/EBIDTA multiples to
increase in future and achieve industry averages by 2020.
December 15th witnessed the first rate hike by Federal
Reserve in nearly a decade. While the Fed has left the door
open for further rates hikes, the low inflation levels are
bound to impede further rate hikes, as the Fed aims for an
inflation level of 2%. Further policy measures such as
quantitative easing have been undertaken by the
European Central Bank as they aim to boost growth in
Europe. Following the trail of certain Central Banks in
Europe, the Bank of Japan recently adopted negative
interest rate in a move to spur growth and ingest liquidity
in the aging Japanese economy.
We forecast the fed funds rate to remain at 0.55% over the
6 months horizon, while we estimate it to reach 1.17%
Page 10
over the next two years. The interest rate hikes are bound
to increase the borrowing costs and thus affect HPE as
businesses around US will find themselves with lesser
liquidity to invest in enterprise infrastructure. However,
we see this as a systematic risk affecting all the players in
the industry.
Strengthening Dollar
A slowdown in China coupled with the recent rate hikes,
makes the dollar an attractive currency as investors
around the world look upon the dollar as a safe haven. Also
the weakness in European markets and the migrant crisis
has further exacerbated the flight to the dollar, which is
increasingly perceived as a stable currency.
A stronger dollar is likely to put downward pressure on US
exports. HPE is strongly dependent on revenue
contributions from overseas operations, is highly prone to
currency fluctuations and continuing strength in US dollar
is likely to affect the top and bottom line revenues of
enterprise firms. HPE uses forward contracts, interest rate
and total return swaps to hedge against currency
fluctuations. Over the next 6 months the EUR/USD is
expected to be $1.05. Our 2-year long-term outlook sees
the Euro weakening against the dollar to $1.04.
GDP growth
With real GDP growth for 3Q2015 at 2% coupled with a 1%
estimated growth rate in 4Q2015, the Henry Fund
research teams’ short-term forecast (6 month) for US Real
GDP growth is 2.08%. Our long-term forecast (2 year)
expects growth to increase to 2.72% by 2018. Our long
term outlook of US economy is modest and we expect the
US economy to be resilient to further interest rate hikes.
We expect the negative top line growth for HPE in 2016
and the growth to pick up thereafter.
Below chart indicate the quarter to quarter Real GDP
growth for US. We are seeing a trend in 2014 and 2015
where in Quarter2 draws in the highest growth and the
growth slowing there on. We base our estimates as
discussed above on these trends.
Source: Bureau of Economic Analysis (34)
Global IT spending
The world-wide IT spending is predicted to rise to $3.54
trillion dollars in 2016, from a 2015 spending level of $3.52,
by a modest 0.6% in 2016. (35)
Worldwide IT Spending Forecast (Billions of U.S.
Dollars)
2015
2015
2016
2016
Spendin
Growt
Spendi
Growt
g
h (%)
ng
h (%)
Data Center
1.8
175
Systems
170
3
Software
310
-1.4
326
5.3
Devices
653
-5.8
641
-1.9
IT Services
912
-4.5
940
3.1
Communicatio
1,454
ns Services
1,472
-8.3
-1.2
0.6
Overall IT
3,517
-5.8
3,536
Source: Gartner
Our revenue growth percentage of -0.66% is slightly below
the IT spending growth rate. The rationale for this is that
we expect certain segment segments such as Enterprise
Group to outperform the market as they cater to the core
competency products of HPE, while we expect certain
segments such as Enterprise services to underperform the
market.
CATALYSTS FOR GROWTH
• The ability to differentiate and build a market share for
HPE is heavily dependent on its ability to produce superior
technology and products. This is directly dependent on its
investment in Research and Development, which currently
averages around $2.2B per year.
• Industry consolidation of the bigger players may put a
downward pressure on cash flows and profits margins. We
Page 11
are already seeing this happening with Dell acquisition of
EMC, and Western Digital acquisition of SanDisk.
INVESTMENT POSITIVES
• The board has announced a $ 3 billion share repurchase
in Oct 2015 without a particular expiration date. Share
repurchases are usually announced when the
management believes that the shares are undervalued,
which may be the case with HPE currently.
• A clarity in business model and a focus on end-to-end
enterprise solutions makes it an attractive proposition for
enterprises seeking to reduce capital expenditure costs.
• A change in strategy from rivalry to partnership with
Microsoft Azure, a public cloud service provider, has the
potential to contribute to the top line.
• Closure of HPE Helion, HPE’s product in the public cloud
space, was a significant decision by the management as
the product was not able to compete with Amazon and
Microsoft web services and was a loss leader.
• A strong culture of innovation backed up by a significant
investment in R&D to the tune of $2.3 in fiscal 2015, $2.2
in 2014, and $2.0 in 2013
• A diversified supplier base with the exception of Intel and
AMD.
• Revenue Stabilization in recent quarters. Three
consistent quarters of top line growth on a constant
currency basis.
INVESTMENT NEGATIVES
• Currency pressure will remain a major headwind as 61%
of revenues come from outside US and hence HPE is
susceptible to foreign currency fluctuations.
• Enterprises often prefer multiple vendors for different
segments of business as opposed to opting for end to end
solutions from a single vendor. This is done to diversify and
reduce risk. This may reduce business for HPE, going
forward
• Industry consolidation by competitors may put a
downward pressure on HPE’s cash flows and may affect
margins. HPE will thus be coerced to compete on price by
reducing margins.
• HPE is likely to suffer from the effects of dis-synergies
resulting from the spin-off. This is likely to add to costs
such as new accounting, finance, human resources teams
and restructuring costs.
VALUATION
The valuation of Hewlett Packard Enterprise was carried
out using DCF, DDM and Relative P/E valuation techniques.
The three approaches presented a price of $21.52, $15.39
and $22.37 respectively. We believe the stock value is
most closely captured by the DCF valuation as it most
closely captures the revenue decomposition and growth
forecasts of the different segments of business. The stock
currently trades for around $15.68 and thus we estimate
an upside of 37% that can be captured in the long run. We
believe this is a value stock and hence we have given a BUY
rating to the stock.
Post the spin-off of HPE from its parent HP Inc. on 1 Nov
2015, HPE presented its first dividend of 5.5 cents per
dollar of share in the first quarter of 2016. In the absence
of historical dividend payments, we have assumed the
2016 payout ratio to continue in the foreseeable future
and have assumed a payout ratio of 12.99%. We retrieve
the value of 12.99% as a ratio of the yearly dividend per
share of 0.22 divided by the forecasted 2016 Earnings per
Share of 1.69. While the DDM seems a good
approximation to the value of the stock, basing the thesis
on a single data point is not the most rationale choice.
Further the data does not capture the management’s
capability or the commitment to pay dividend in the
future. Hence we chose to put less emphasis on the DDM
model.
In carrying out Relative P/E valuation we chose
competitors of HPE in different segments and assigned a
weightage according to the percentage contributed to
revenue. We noted that the biggest revenue segments
were Enterprise Group and Enterprise Services, and the
two catered to a different set of competitors. We chose to
include the weightage of the other segments in the above
two due to the relatively small contribution of 6% and 7%
to the total revenue and because the other segments have
an overlapping peer base as the above two. For the
Page 12
Enterprise Group we chose EMC, Western Digital, Seagate,
NetApp, and IBM in the storage and server space while we
chose CISCO and VMWare in the networking space. We
also included Hewlett Packard Inc., which is a sister
company of HPE and hence closely resembles its business
model. For the Enterprise Services we chose Computer
Science Corporation, Wipro, and Infosys. While this is a
better approximation than the DDM model, we chose to
put less emphasis on this model because we feel the P/E
assumes an efficient market, which may not be the case
and the prices may be skewed for an entire industry.
Below charts summarizes the peer comparisons:
Enterprise Group, Weight 0.7
Ticker Company
EMC
EMC Corp
WDC
Western Digital
STX
Seagate Technology
NTAP
NetApp
IBM
IBM
HPQ
Hewlett Packard Inc.
CSCO
Cisco
VMW
VMware
Source: FactSet
P/E 16
14.2
8.3
12.5
12.1
10.3
7.1
11.7
12.2
Enterprise Services, Weight 0.3
Ticker
Company
Computer Science
CSC
Corporation
WIT
Wipro
INFY
Infosys
Source: FactSet
P/E 16
12.4
21.7
20.6
The DCF model was based on the revenue decomposition
of different areas of business. Under the gamut of
Enterprise Group segment, we have assumed an industry
growth rate for the Industry Standard Servers subsegment of 2.71%, 2.56% and 1.26% in 2016, 2017 and
2018 respectively. We estimate Networking sub-segment
to grow at 10.63%, 10.87% and 11.25% in 2016, 2017 and
2018 respectively. The strong growth in Networking is
primarily due to the acquisition of Aruba. We estimate
Aruba product sales to grow at a Compounded Annual
Growth Rate of 30%. The rationale behind this choice of
assumption is that Aruba has grown at 25-30% CAGR for
the five years prior to being acquired by HPE. We give a
weightage of around 27% to Aruba Sales and the rest 63%
to other networking products for which we have assumed
industry growth rates of 3.19%, 3.53% and 4.05% in 2016,
2017 and 2018 respectively. This presents us with growth
values for Networking as discussed above. Further, the
Storage sub-segment is expected to grow at 3.19% in 2016
and the growth to pick up thereafter. The rationale behind
this choice is that the products under these categories are
technically superior and encompass the core
competencies of HPE and are thus expected to match the
industry growth rates. In the wake of its choice to quit its
operations in public cloud and partner with Microsoft, we
expect this division to do well in the hybrid cloud market.
Further the acquisition of Aruba will spur growth in the
networking space. Also we have assumed the Business
Critical Systems and Technology Services sub segment to
growth at the inflationary rates of 0.7%, the reason being
that historically these sub segments have not contributed
significantly to top line, but are expected to perform
modestly due to the restructuring.
We have modeled the Infrastructure Technology
Outsourcing sub-segment of Enterprise Services segment
to reflect negative historical growth rates. We expect the
negative trend to continue into the foreseeable future and
have projected growth rates of -11.16%,-8.56% and -5.96%
in 2016, 2017 and 2018 respectively. We expect the
growth to be positive post 2020. There has been no key
differentiating product in this segment or a strategic
decision by the management in this area and hence we
expect shrinking revenue growth to carry into 2016. We
expect the Application and Business services sub-segment
to match IT services Industry growth rate of 3.49%, 3.34%
and 3.39% in 2016, 2017 and 2018 respectively, owing to
the good reputation of HPE in this genre.
Similarly we have assumed industry growth rates for the
Software segment and expect it to grow by 3.49%, 3.34%
and 3.39% in 2016, 2017 and 2018 respectively.
We expect the negative trend in Financial Services
segment to continue partially offset by the GDP growth
Page 13
rate of 2.6% of the economy. Hence we assume a growth
rate of -5.46%, -2.86% and -0.26% in 2016, 2017 and 2018
respectively.
Assumptions
Beta: We have used Fama-French three factor model
analysis to obtain the Beta of the company. The retrieved
Beta of 1.65 is indicative of the high risk premium the
market has associated with a newly spun off company and
the value captures the limited amount of data set available
since Oct 2015.
CV growth of NOPLAT: We have used a conservative CV
growth rate matching the inflation rate. The rationale
behind this is that we expect future fed fund rate hikes to
cause a slow growth of the economy and thus we assume
a modest growth.
Risk Premium: We believe that a 5% risk premium
adequately captures the risk associated with the market
over and above the risk free rate.
We assume that COGS as a percentage of Sales for 2015 to
continue in the foreseeable future. Thus we assume values
of 24.91% and 45.96% for cost of products and cost of
services respectively that reflect the 2015 COGS to Sales
ratio. The reason for choice of 2015 values is because 2015
provides the most approximate trend post the spin-off.
Also, we are using historic R&D and SG&A as a percentage
of sales to forecast future values. The values chosen here
are 3.84% and 15.11% respectively that reflect the 2015
ratios. The reason for this is that we are noticing relatively
consistent trends in such expenses. Due to the spin-off
certain costs such as accounting, Human Resources,
finance costs are likely to increase. However this is
captured in SG&A as a percentage of Sales.
Further, we are assuming a straight line depreciation for
amortization of intangible assets. Certain costs such as
separation costs, defined benefit plan settlement charges
and impairment of data center asset are one-time costs,
related to the spin-off, and hence are not likely to carry
forward.
Assumption of a consensus estimate of 5% for risk
premium coupled with a high Beta has added to the cost
of equity, in turn increasing the WACC estimate.
We are seeing a high deviation of cost of equity from
Return of equity in steady state, which reaffirms our belief
that this is a value stock and not a growth stock. This
deviation is probably due to the effects of dis synergies
and also due to the higher uncertainty that is prevalent in
market with the spin-off that has caused a higher valuation
of beta.
KEYS TO MONITOR
Our model is highly susceptible to growth estimates for
HPE. It is quite reasonable that we change our
recommendation if HPE is unable to achieve the top line
growth that has been set.
Another factor to be monitored is the beta. Owing to the
limited amount of data as applicable to the months OctMar, we have computed a beta that has captured the high
amount of risk associated with the spin-off. However, we
expect over time for the beta to slowly reduce and move
towards industry average. This factor should be constantly
updated on a periodic basis and plugged in to the model to
obtain a better forecast.
Further the fed funds rate is a key ratio that needs to be
monitored. In the event of a rate hike, the reaction of the
market to enterprise spending needs to be monitored.
HPE has placed a significant emphasis on Research and
Development and have historically averaged around $2.2
B. While there has been no public disclosures of any new
products, it is quite reasonable to expect innovative
products in the near future. Any such public
announcements needs to be monitored and the market
relevance of these products needs to be assessed.
Apart from the domestic market, HPE caters to large
markets in UK and China. The strength of the US dollar in
relation to the Yuan and Pound also needs to be
monitored, along with macro-economic factors affecting
these countries.
The gross PPE forecast is grown at a percentage value of
7.88% reflecting the CAGR for the year 2013 to 2015, as we
expect the historical trends to continue.
Page 14
REFERENCES
1. Hewlett Packard Enterprise Inc. 10K
2. CRN-Magazine
http://www.crn.com/news/cloud/300078558/hpshelion-public-cloud-bursts-set-to-shut-down-jan31.htm/pgno/0/1
3. Aruba Networks Website
http://www.arubanetworks.com/aruba-networks-hpto-join-forces/
4. Statista
http://www.statista.com.proxy.lib.uiowa.edu/statistic
s/483062/global-it-services-growth-forecast/
5. Business Insider Magazine
http://www.businessinsider.com/hp-shutting-downhp-helion-public-cloud-2015-10
6. CRN Magazine
http://www.crn.com/slideshows/virtualization/300079205/top-10-hewlettpackard-enterprise-stories-of-the-year.htm/pgno/0/10
7. VM Blog
http://vmblog.com/archive/2016/02/15/hewlettpackard-enterprise-hpe-acquires-vm-backup-softwareprovider-trilead.aspx#.VtPjovkrLIU
8. http://www.businessinsider.com/meg-whitman-hpewill-sell-microsofts-cloud-2015-11
9. FactSet
10. Thomson One
11. https://support.rackspace.com/white-paper/hybridcloud-the-evolved-enterprise-cloud-of-the-future/
12. Gartner
http://www.gartner.com/newsroom/id/2599315
13. Portfolio Visualizer
https://www.portfoliovisualizer.com/factoranalysis#analysisResults
14. Fortune Magazine
http://fortune.com/2016/03/03/hewlett-packardenterprise-revenue-slowdown/?xid=yahoo_fortune
15. Seeking Alpha
http://seekingalpha.com/article/3954136-hewlettpackard-enterprise-hpe-margaret-c-whitman-q12016-results-earnings-call-transcript
16. ZD Net
http://www.zdnet.com/article/hp-tsinghua-partnerin-joint-chinese-enterprise-tech-venture/
17. PC World
http://www.pcworld.com/article/2925612/hp-sellsmajority-stake-of-china-server-storage-business-totsinghua-holdings.html
18. http://searchvirtualstorage.techtarget.com/definition
/hyper-convergence
19. Bureau of Economic Analysis
http://www.bea.gov/newsreleases/national/gdp/gdp
newsrelease.htm
20. Mergent
21. Yahoo Finance
22. Google Finance
23. Hewlett Packard Enterprise Investor Relations
24. Aswath Damodaran Data
25. HPE Newsroom
http://h30261.www3.hp.com/news-andevents/news-library/2015/02-03-2015.aspx
26. Bloomberg
http://www.bloomberg.com/news/articles/2015-0302/hewlett-packard-agrees-to-buy-aruba-networksfor-2-7-billion
27. Yahoo Finance
http://finance.yahoo.com/news/why-did-hp-acquirearuba-180512649.html
28. Wall Street Journal
http://www.wsj.com/articles/hewlett-packard-tobuy-aruba-networks-1425303619
29. CRN
http://www.crn.com/slideshows/networking/300075989/the-big-picture-5viewpoints-on-hps-acquisition-of-arubanetworks.htm/pgno/0/5
30. http://www.securedgenetworks.com/blog/what-thehp-acquisition-of-aruba-networks-means-tocustomers
31. Trilead
https://www.trilead.com/
32. HPE Newsroom
http://investors.hpe.com/~/media/Files/H/HPEnterprise-IR/documents/fy16-q1-hpe-earningspresentation.pdf
33. Bloomberg
http://www.bloomberg.com/news/articles/2015-0521/hp-says-tsinghua-holdings-to-buy-control-ofchinese-asset
34. Bureau of Economic Analysis
http://www.bea.gov/newsreleases/national/gdp/gdp
_glance.htm
35. Gartner
http://www.gartner.com/newsroom/id/3186517
Page 15
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
Page 16
Hewlett Packard Enterprise Company
Revenue Decomposition
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Total net revenue
% Change Y-Y
Fiscal Years Ending Dec. 31
57371.00
-6.01%
55123.00
-3.92%
52107.00
-5.47%
51761.68
‐0.66%
51974.82
0.41%
52518.11
1.05%
53510.56
1.89%
54842.79
2.49%
Enterprise Group
Industry Standard Servers
12100.00
12472.00
3.07%
2628.00
4.08%
3315.00
‐4.58%
929.00
‐21.93%
8383.00
‐3.64%
13412.00
7.54%
2846.00
8.30%
3180.00
‐4.07%
807.00
‐13.13%
7662.00
‐8.60%
27989.00
27727.00
27907.00
48.79%
‐0.94%
50.30%
0.65%
53.56%
13775.47
2.71%
3148.45
10.63%
3281.44
3.19%
812.65
0.70%
7715.63
0.70%
28733.64
2.96%
55.51%
14128.12
2.56%
3490.77
10.87%
3397.28
3.53%
818.34
0.70%
7769.64
0.70%
29604.14
3.03%
56.96%
14306.13
1.26%
3883.42
11.25%
3534.87
4.05%
824.07
0.70%
7824.03
0.70%
30372.52
2.60%
57.83%
14650.91
2.41%
4264.13
9.80%
3607.33
2.05%
829.83
0.70%
7878.80
0.70%
31231.00
2.83%
58.36%
15004.00
2.41%
4682.15
9.80%
3681.28
2.05%
835.64
0.70%
7933.95
0.70%
32137.02
2.90%
58.60%
14038.00
‐7.77%
8360.00
‐5.63%
12107.00
‐13.76%
7699.00
‐7.91%
24080.00
22398.00
19806.00
41.97%
‐6.99%
40.63%
‐11.57%
38.01%
10756.40
‐11.16%
7967.70
3.49%
18724.10
‐5.46%
36.17%
9836.13
‐8.56%
8233.82
3.34%
18069.95
‐3.49%
34.77%
9250.34
‐5.96%
8512.94
3.39%
17763.28
‐1.70%
33.82%
8939.94
‐3.36%
8797.27
3.34%
17737.22
‐0.15%
33.15%
8872.40
‐0.76%
9061.19
3%
17933.59
1.11%
32.70%
4035.00
3933.00
3622.00
7.03%
‐2.53%
7.13%
‐7.91%
6.95%
3748.41
3.49%
7.24%
3873.60
3.34%
7.45%
4004.92
3.39%
7.63%
4138.68
3.34%
7.73%
4262.84
3%
7.77%
3629.00
3498.00
3216.00
6.33%
‐3.61%
6.35%
‐8.06%
6.17%
3040.35
‐5.46%
5.87%
2953.34
‐2.86%
5.68%
2945.61
‐0.26%
5.61%
3014.49
2.34%
5.63%
3163.35
4.94%
5.77%
7.88
12.50%
0.02%
8.86
12.50%
0.02%
9.97
12.50%
0.02%
11.21
12.50%
0.02%
12.61
12.50%
0.02%
2492.69
1.70%
4.82%
2535.08
1.70%
4.88%
2578.19
1.70%
4.91%
2622.04
1.70%
4.90%
2666.64
1.70%
4.86%
% Change Y-Y
Networking
2525.00
% Change Y-Y
Storage
3474.00
% Change Y-Y
Business Critical Systems
1190.00
% Change Y-Y
Technology Services
Enterprise Group Total Revenue
% Change Y-Y
% of Total Revenue
Enterprise Services
Infrastrucuture technology Outsourcing
8700.00
15221.00
% Change Y-Y
Application and Business Services
8859.00
% Change Y-Y
Enterprise Services Total Revenue
% Change Y-Y
% of Total Revenue
Software
% Change Y-Y
% of Total Revenue
Financial Services
% Change Y-Y
% of Total Revenue
Corporate Investments
% Change Y-Y
% of Total Revenue
Intersegment Net Revenue and Other
% Change Y-Y
% of Total Revenue
8.00
4.00
7.00
0.01%
‐50.00%
0.01%
75.00%
0.01%
2370.00
2437.00
2451.00
4.13%
2.83%
4.42%
0.57%
4.70%
Hewlett Packard Enterprise Company
Income Statement
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Total net revenue
Fiscal Years Ending Dec. 31
57371.00
55123.00
52107.00
51761.68
51974.82
52518.11
53510.56
54842.79
Costs and Expenses
Cost of products
Cost of services
Financing interest
Research & development
Selling, general & administrative
Amortization of intangible assets
Impairment of goodwill & intangible assets
Restructuring charges
Acquisition-related charges
Separation costs
Defined benefit plan settlement charges
Impairment of data center assets
Total operating expenses
12360.00
28958.00
312.00
1956.00
8601.00
1228.00
0.00
983.00
21.00
0.00
0.00
0.00
54419.00
12394.00
26815.00
277.00
2197.00
8717.00
906.00
0.00
1471.00
11.00
0.00
0.00
0.00
52788.00
12978.00
23950.00
240.00
2338.00
8025.00
852.00
0.00
954.00
89.00
797.00
225.00
136.00
50584.00
12891.99
23791.28
262.20
1987.00
7819.00
386.0
0.00
763.2
71.2
0.00
0.00
0.00
47971.87
12945.08
23889.25
263.28
1995.18
7851.19
386.0
0.00
572.4
53.4
0.00
0.00
0.00
47955.78
13080.39
24138.96
266.04
2016.03
7933.26
386.0
0.00
381.6
35.6
0.00
0.00
0.00
48237.88
13327.58
24595.12
271.06
2054.13
8083.18
386.0
0.00
190.8
17.8
0.00
0.00
0.00
48925.67
13659.39
25207.45
277.81
2105.27
8284.42
386.0
0.00
0.0
0.0
0.00
0.00
0.00
49920.35
2952.00
-81.00
2871.00
820.00
2051.00
1742.52
1.18
2335.00
-91.00
2244.00
596.00
1648.00
1742.52
0.95
1523.00
-53.00
1470.00
-991.00
2461.00
1804.00
1742.52
1.36
3789.81
‐70.39
3719.41
795.95
2923.46
1725.89
1709.26
1.69
4019.04
‐70.68
3948.35
844.95
3103.41
1694.50
1679.75
1.83
4280.22
‐71.42
4208.80
900.68
3308.12
1666.69
1653.62
1.98
4584.89
‐72.77
4512.12
965.59
3546.52
1642.09
1630.55
2.16
4922.44
‐74.58
4847.86
1037.44
3810.41
1620.39
1610.23
2.35
Dividends per share
-
-
-
Payout Ratio
-
-
-
0.22
12.99%
0.24
12.99%
0.26
12.99%
0.28
12.99%
0.31
12.99%
Operating Income(loss)
Interest & other, net
Earnings (loss) before taxes
Provision for taxes
Net earnings (loss)
Weighted average shares outstanding-basic
Year end shares outstanding
Net earnings per share-basic
Hewlett Packard Enterprise Company
Balance Sheet
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Current Assets
Cash & cash equivalents
Accounts receivable, gross
Less: allowance for doubtful accounts
Accounts receivable, net
Financing receivables
Inventory
Deferred tax assets - short-term
Value-added taxes receivable
Supplier & other receivables
Prepaid & other current assets
Total other current assets
Total current assets
Property, plant & equipment, gross
Less: accumulated depreciation
Property, plant & equipment, net
Long-term financing receivables & other assets
Goodwill
Intangible assets
Total assets
Fiscal Years Ending Dec. 31
2182.00
9608.00
150.00
9458.00
3170.00
2078.00
2218.00
1213.00
730.00
3330.00
7491.00
24379.00
17062.00
8552.00
8510.00
7004.00
25945.00
2937.00
68775.00
2319.00
8549.00
126.00
8423.00
2974.00
1884.00
1522.00
1165.00
777.00
2967.00
6431.00
22031.00
16960.00
8440.00
8520.00
6503.00
25960.00
2057.00
65071.00
9842.00
8647.00
109.00
8538.00
2918.00
2198.00
1210.00
1538.00
1992.00
2937.00
7677.00
31173.00
21424.00
11538.00
9886.00
11020.00
27261.00
1930.00
81270.00
16350.35
8428.66
120.64
8308.02
2850.46
1942.46
1544.10
1238.72
1122.35
2902.68
6807.85
36259.14
23113.06
16234.93
6878.12
7790.87
27261.00
1544.00
79733.14
22079.83
8463.37
121.14
8342.23
2862.19
1950.46
1550.46
1243.82
1126.97
2914.63
6835.88
42070.60
23274.85
19502.80
3772.05
7822.96
27261.00
1158.00
82084.61
26475.14
8551.84
122.41
8429.43
2892.11
1970.85
1566.67
1256.83
1138.75
2945.10
6907.34
46674.87
23437.77
21294.94
2142.84
7904.73
27261.00
772.00
84755.44
30254.54
8713.44
124.72
8588.72
2946.77
2008.09
1596.27
1280.58
1160.27
3000.75
7037.87
50835.99
23601.84
22313.02
1288.82
8054.11
27261.00
386.00
87825.92
33820.21
8930.38
127.82
8802.55
3020.13
2058.08
1636.02
1312.46
1189.16
3075.46
7213.09
54914.06
23767.05
22925.35
841.70
8254.63
27261.00
0.00
91271.39
Notes payable & short-term borrowings
Accounts payable
Employee compensation & benefits
Taxes on earnings
Deferred revenue
Accrued restructuring
Total other accrued liabilities
Total current liabilities
Long-term debt
Pension liabilities
Deferred revenue - long-term
Deferred tax liability - long-term
Tax liability - long-term
Other long-term liabilities
Total other liabilities
Total non current liabilities
Total Liabilities
1058.00
4335.00
3087.00
711.00
5528.00
698.00
5495.00
20912.00
617.00
2602.00
3183.00
1672.00
450.00
964.00
8871.00
9488.00
30400.00
894.00
4889.00
2737.00
706.00
5129.00
711.00
4694.00
19760.00
485.00
2606.00
3109.00
568.00
408.00
963.00
7654.00
8139.00
27899.00
691.00
5828.00
2902.00
634.00
5154.00
628.00
6314.00
22151.00
15103.00
3432.00
3565.00
1238.00
778.00
1085.00
10098.00
25201.00
47352.00
691.00
4763.80
2746.02
634.00
4974.53
640.41
5212.55
19662.32
15103.00
3432.00
3214.60
462.40
778.00
1085.00
8971.99
24074.99
43737.31
691.00
4783.42
2757.32
634.00
4995.02
643.05
5234.02
19737.82
15103.00
3432.00
3227.83
490.86
778.00
1085.00
9013.69
24116.69
43854.52
691.00
4833.42
2786.14
634.00
5047.23
649.77
5288.73
19930.29
15103.00
3432.00
3261.57
523.24
778.00
1085.00
9079.81
24182.81
44113.10
691.00
4924.76
2838.80
634.00
5142.61
662.05
5388.67
20281.88
15103.00
3432.00
3323.21
560.95
778.00
1085.00
9179.16
24282.16
44564.04
691.00
5047.37
2909.47
634.00
5270.64
678.53
5522.83
20753.84
15103.00
3432.00
3405.95
602.68
778.00
1085.00
9303.63
24406.63
45160.47
Parent company investment
Accumulated other comprehensive income (loss)
Treasury Stock
Equity attributable to the Company
Retained Earnings
Non-controlling interests
Total equity
39683.00
-1695.00
0.00
37988.00
0.00
387.00
38375.00
39024.00
-2248.00
0.00
36776.00
0.00
396.00
37172.00
38550.00
-5015.00
0.00
33535.00
0.00
383.00
33918.00
38080.41
‐5015.00
600.00
33065.41
2547.42
383.00
35995.83
37610.82
‐5015.00
600.00
32595.82
5251.27
383.00
38230.09
37141.23
‐5015.00
600.00
32126.23
8133.10
383.00
40642.33
36671.64
‐5015.00
600.00
31656.64
11222.24
383.00
43261.88
36202.05
‐5015.00
600.00
31187.05
14540.87
383.00
46110.92
Total Liabilities and Stockholders equity
68775.00
65071.00
81270.00
79733.14
82084.61
84755.44
87825.92
91271.39
Hewlett Packard Enterprise Company
Cash Flow Statement
Fiscal Years Ending Dec. 31
2016E
Net Income
Add: Depreciation Expense
Add:Amortization
Accounts receivable, net
Financing receivables
Inventory
Total other current assets
Long-term financing receivables & other assets
Intangible assets
Accounts payable
Employee compensation & benefits
Taxes on earnings
Deferred revenue
Accrued restructuring
Total other liabilities
Total other accrued liabilities
Net cash flows from operating activities
2923.46
4696.93
386.00
229.98
67.54
255.54
869.15
3229.13
0.00
‐1064.20
‐155.98
0.00
‐179.47
12.41
‐1126.01
‐1101.45
9043.04
2017E
3103.41
3267.86
386.00
‐34.21
‐11.74
‐8.00
‐28.03
‐32.08
0.00
19.62
11.31
0.00
20.48
2.64
41.70
21.46
6760.42
2018E
3308.12
1792.14
386.00
‐87.20
‐29.92
‐20.39
‐71.45
‐81.77
0.00
50.00
28.82
0.00
52.21
6.72
66.12
54.71
5454.11
2019E
3546.52
1018.08
386.00
‐159.29
‐54.65
‐37.24
‐130.53
‐149.38
0.00
91.34
52.65
0.00
95.38
12.28
99.34
99.94
4870.44
2020E
3810.41
612.33
386.00
‐213.83
‐73.36
‐49.99
‐175.22
‐200.52
0.00
122.61
70.68
0.00
128.03
16.48
124.48
134.16
4692.26
Property, plant & equipment, gross
Goodwill
Non-controlling interests
Net cash flows from investing activities
‐1689.06
0.00
0.00
‐1689.06
‐161.79
0.00
0.00
‐161.79
‐162.92
0.00
0.00
‐162.92
‐164.06
0.00
0.00
‐164.06
‐165.21
0.00
0.00
‐165.21
Notes payable & short-term borrowings
Long-term debt
Change in Common Stock
Payment of Cash Dividend
Net cash flows from financing activities
0.00
0.00
‐469.59
‐376.04
‐845.63
0.00
0.00
‐469.59
‐399.56
‐869.15
0.00
0.00
‐469.59
‐426.29
‐895.88
0.00
0.00
‐469.59
‐457.38
‐926.97
0.00
0.00
‐469.59
‐491.79
‐961.38
Cash Flow from all activities:
Net increase in cash & cash equivalents
Cash & cash equivalents, beginning of year
Cash & cash equivalents, end of year
6508.35
5729.48
4395.31
3779.40
3565.66
9842
16350
22080
26475
30255
16,350.35 22,079.83 26,475.14 30,254.54 33,820.21
Hewlett Packard Enterprise Company
Cash Flow Statement
Fiscal Years Ending Dec. 31
Net earnings (loss)
Adjustments
Depreciation & amortization
Impairment of goodwill & intangible assets
Stock-based compensation expense
Provision for doubtful accounts
Provision for inventory
Restructuring charges
Deferred taxes on earnings
Excess tax benefit from stock-based compensation
Other adjustments, net
Accounts receivable
Financing receivables
Inventory
Accounts payable
Taxes on earnings
Restructuring
Other assets & liabilities
Net cash flows from operating activities
Investment in property, plant and equipment
Proceeds from sale of property, plant & equipment
Purchases of available-for-sale securities & other investments
Maturities & sales of available-for-sale securities & other investments
Payments made in connection with business acquisitions, net of cash acquired
Proceeds from business divestiture, net
Net cash flows from investing activities
Short-term borrowings with original maturities less than 90 days, net
Issuance of debt
Payment of debt
Net transfers to Parent
Issuance of Senior Notes relating to separation
Distribution of net proceeds of senior notes relating to separation to Parent
Cash dividends paid to non-controlling interests
Excess tax benefit from stock-based compensation
Net cash flows from financing activities
Cash Flow from all activities:
Net increase in cash & cash equivalents
Cash & cash equivalents, beginning of year
Cash & cash equivalents, end of year
2013
2014
2015
2051.00
1648.00
2461.00
4396.00
374.00
81.00
161.00
983.00
-248.00
-1.00
325.00
580.00
478.00
-251.00
472.00
532.00
-733.00
-461.00
8739.00
-2497.00
370.00
-938.00
1005.00
-167.00
-2227.00
-121.00
1083.00
-2200.00
-5196.00
-31.00
1.00
-6464.00
4144.00
427.00
80.00
125.00
1471.00
-304.00
-44.00
11.00
986.00
428.00
69.00
611.00
404.00
-1239.00
-1906.00
6911.00
-3620.00
606.00
-940.00
1023.00
-49.00
6.00
-2974.00
18.00
852.00
-1135.00
-3542.00
-37.00
44.00
-3800.00
3947.00
565.00
52.00
155.00
954.00
-2522.00
-100.00
376.00
9.00
-393.00
-424.00
868.00
956.00
-1021.00
-2222.00
3661.00
-3344.00
380.00
-243.00
298.00
-2644.00
140.00
-5413.00
-39.00
866.00
-1077.00
9440.00
14546.00
-14529.00
-32.00
100.00
9275.00
48.00
2134.00
2182.00
137.00
2182.00
2319.00
7523.00
2319.00
9842.00
Hewlett Packard Enterprise Company
Common Size Income Statement
Fiscal Years Ending Dec. 31
Total net revenue
Costs and Expenses
Cost of products
Cost of services
Financing interest
Research & development
Selling, general & administrative
Amortization of intangible assets
Impairment of goodwill & intangible assets
Restructuring charges
Acquisition-related charges
Separation costs
Defined benefit plan settlement charges
Impairment of data center assets
Total operating expenses
Operating Income(loss)
Interest & other, net
Earnings (loss) before taxes
Provision for taxes
Net earnings (loss)
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
21.54%
50.47%
0.54%
3.41%
14.99%
2.14%
22.48%
48.65%
0.50%
3.99%
15.81%
1.64%
24.91%
45.96%
0.46%
4.49%
15.40%
1.64%
24.91%
45.96%
0.51%
3.84%
15.11%
0.75%
24.91%
45.96%
0.51%
3.84%
15.11%
0.74%
24.91%
45.96%
0.51%
3.84%
15.11%
0.73%
24.91%
45.96%
0.51%
3.84%
15.11%
0.72%
24.91%
45.96%
0.51%
3.84%
15.11%
0.70%
1.71%
0.04%
2.67%
0.02%
1.47%
0.14%
1.10%
0.10%
0.73%
0.07%
0.36%
0.03%
0.00%
0.00%
94.85%
95.76%
1.83%
0.17%
1.53%
0.43%
0.26%
97.08%
92.68%
92.27%
91.85%
91.43%
91.02%
5.15%
‐0.14%
5.00%
1.43%
3.57%
4.24%
‐0.17%
4.07%
1.08%
2.99%
2.92%
‐0.10%
2.82%
‐1.90%
4.72%
7.32%
‐0.14%
7.19%
1.54%
5.65%
7.73%
‐0.14%
7.60%
1.63%
5.97%
8.15%
‐0.14%
8.01%
1.71%
6.30%
8.57%
‐0.14%
8.43%
1.80%
6.63%
8.98%
‐0.14%
8.84%
1.89%
6.95%
Hewlett Packard Enterprise Company
Common Size Balance Sheet
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
3.80%
16.75%
0.26%
16.49%
5.53%
3.62%
3.87%
2.11%
1.27%
5.80%
13.06%
42.49%
29.74%
12.21%
45.22%
5.12%
119.88%
4.21%
15.51%
0.23%
15.28%
5.40%
3.42%
2.76%
2.11%
1.41%
5.38%
11.67%
39.97%
30.77%
49.47%
‐18.70%
11.80%
47.09%
3.73%
118.05%
18.89%
16.59%
0.21%
16.39%
5.60%
4.22%
2.32%
2.95%
3.82%
5.64%
14.73%
59.82%
41.12%
68.03%
‐26.92%
21.15%
52.32%
3.70%
155.97%
31.59%
16.28%
0.23%
16.05%
5.51%
3.75%
2.98%
2.39%
2.17%
5.61%
13.15%
70.05%
44.65%
31.36%
13.29%
15.05%
52.67%
2.98%
154.04%
42.48%
16.28%
0.23%
16.05%
5.51%
3.75%
2.98%
2.39%
2.17%
5.61%
13.15%
80.94%
44.78%
37.52%
7.26%
15.05%
52.45%
2.23%
157.93%
50.41%
16.28%
0.23%
16.05%
5.51%
3.75%
2.98%
2.39%
2.17%
5.61%
13.15%
88.87%
44.63%
40.55%
4.08%
15.05%
51.91%
1.47%
161.38%
56.54%
16.28%
0.23%
16.05%
5.51%
3.75%
2.98%
2.39%
2.17%
5.61%
13.15%
95.00%
44.11%
41.70%
2.41%
15.05%
50.95%
0.72%
164.13%
61.67%
16.28%
0.23%
16.05%
5.51%
3.75%
2.98%
2.39%
2.17%
5.61%
13.15%
100.13%
43.34%
41.80%
1.53%
15.05%
49.71%
0.00%
166.42%
Notes payable & short-term borrowings
Accounts payable
Employee compensation & benefits
Taxes on earnings
Deferred revenue
Accrued restructuring
Total other accrued liabilities
Total current liabilities
Long-term debt
Total other liabilities
Total non current liabilities
Total Liabilities
1.84%
7.56%
5.38%
1.24%
9.64%
1.22%
9.58%
36.45%
1.08%
15.46%
16.54%
52.99%
1.62%
8.87%
4.97%
1.28%
9.30%
1.29%
8.52%
35.85%
0.88%
13.89%
14.77%
50.61%
1.33%
11.18%
5.57%
1.22%
9.89%
1.21%
12.12%
42.51%
28.98%
19.38%
48.36%
90.87%
1.33%
9.20%
5.31%
1.22%
9.61%
1.24%
10.07%
37.99%
29.18%
17.33%
46.51%
84.50%
1.33%
9.20%
5.31%
1.22%
9.61%
1.24%
10.07%
37.98%
29.06%
17.34%
46.40%
84.38%
1.32%
9.20%
5.31%
1.21%
9.61%
1.24%
10.07%
37.95%
28.76%
17.29%
46.05%
84.00%
1.29%
9.20%
5.31%
1.18%
9.61%
1.24%
10.07%
37.90%
28.22%
17.15%
45.38%
83.28%
1.26%
9.20%
5.31%
1.16%
9.61%
1.24%
10.07%
37.84%
27.54%
16.96%
44.50%
82.35%
Parent company investment
Accumulated other comprehensive income (loss)
Treasury Stock
Equity attributable to the Company
Retained Earnings
Non-controlling interests
Total equity
69.17%
‐2.95%
0.00%
66.21%
0.00%
0.67%
66.89%
70.79%
‐4.08%
0.00%
66.72%
0.00%
0.72%
67.43%
73.98%
‐9.62%
0.00%
64.36%
0.00%
0.74%
65.09%
73.57%
‐9.69%
1.16%
63.88%
4.92%
0.74%
69.54%
72.36%
‐9.65%
1.15%
62.71%
10.10%
0.74%
73.56%
70.72%
‐9.55%
1.14%
61.17%
15.49%
0.73%
77.39%
68.53%
‐9.37%
1.12%
59.16%
20.97%
0.72%
80.85%
66.01%
‐9.14%
1.09%
56.87%
26.51%
0.70%
84.08%
119.88%
118.05%
155.97%
154.04%
157.93%
161.38%
164.13%
166.42%
Current Assets
Cash & cash equivalents
Accounts receivable, gross
Less: allowance for doubtful accounts
Accounts receivable, net
Financing receivables
Inventory
Deferred tax assets - short-term
Value-added taxes receivable
Supplier & other receivables
Prepaid & other current assets
Total other current assets
Total current assets
Property, plant & equipment, gross
Less: accumulated depreciation
Property, plant & equipment, net
Long-term financing receivables & other assets
Goodwill
Intangible assets
Total assets
Total Liabilities and Stockholders equity
Hewlett Packard Enterprise Company
Value Driver Estimation
Fiscal Years Ending Dec. 31
Marginal Tax Rate Calculation
Federal Statuatory rate
State income taxes, net of federal tax benefit
Foreign rate differential Marginal Tax Rate 2013
2014
2015
2016E
2017E
2018E
2019E
2020E
35.00%
2.00%
‐19.90%
17.10%
35.00%
2.40%
‐9.60%
27.80%
35.00%
14.10%
‐53.60%
‐4.50%
35.00%
14.10%
‐27.70%
21.40%
35.00%
14.10%
‐27.70%
21.40%
35.00%
14.10%
‐27.70%
21.40%
35.00%
14.10%
‐27.70%
21.40%
35.00%
14.10%
‐27.70%
21.40%
EBITA Calculation
Total Revenue
‐COGS
‐SG&A
‐Research and Development
‐Amortization of Purchased Intangible Assets
+Implied Interest on Operating Leases
‐Financing Interest
EBITA
57371.00
‐41318.00
‐8601.00
‐1956.00
‐1228.00
0.00
‐312.00
3956.00
55123.00
‐39209.00
‐8717.00
‐2197.00
‐906.00
0.00
‐277.00
3817.00
52107.00
‐36928.00
‐8025.00
‐2338.00
‐852.00
0.00
‐240.00
3724.00
51761.68
‐36683.27
‐7819.00
‐1987.00
‐386.00
112.43
‐262.20
4736.63
51974.82
‐36834.32
‐7851.19
‐1995.18
‐386.00
121.29
‐263.28
4766.13
52518.11
‐37219.35
‐7933.26
‐2016.03
‐386.00
130.85
‐266.04
4828.28
53510.56
‐37922.70
‐8083.18
‐2054.13
‐386.00
141.17
‐271.06
4934.66
54842.79
‐38866.84
‐8284.42
‐2105.27
‐386.00
152.30
‐277.81
5074.74
Less Adjusted Income Taxes
Provision for income taxes
+Tax Shield on Interest expense
+Tax Shield on Restructuring Charges
+Tax Shield on Acquisition related charges
+Tax Shield on Op Lease interest
+Tax Shield on Impairment of Goodwill & intangible assets
+Tax Shield on Separation Costs
+Tax Shield on Defined benefit plan settlement charges
+Tax Shield on Impairment of data center assets
‐Tax on Investment Gains
Total Adjusted Taxes
820.00
13.85
168.09
3.59
0.00
0.00
0.00
0.00
0.00
0.00
1005.54
596.00
25.30
408.94
3.06
0.00
0.00
0.00
0.00
0.00
0.00
1033.29
‐991.00
‐2.39
‐42.93
‐4.01
0.00
0.00
‐35.87
‐10.13
‐6.12
0.00
‐1092.43
795.95
15.06
163.32
15.24
24.06
0.00
0.00
0.00
0.00
0.00
1013.64
844.95
15.13
122.49
11.43
25.96
0.00
0.00
0.00
0.00
0.00
1019.95
900.68
15.28
81.66
7.62
28.00
0.00
0.00
0.00
0.00
0.00
1033.25
965.59
15.57
40.83
3.81
30.21
0.00
0.00
0.00
0.00
0.00
1056.02
1037.44
15.96
0.00
0.00
32.59
0.00
0.00
0.00
0.00
0.00
1085.99
Plus Changes in Deferred Taxes
Change in Deferred Taxes
‐248.00
‐304.00
‐2522.00
‐1109.71
22.10
16.17
8.10
2.00
NOPLAT: EBITA‐Adjusted Taxes+Change in DT
NOPLAT
2702.47
2479.71
2294.43
2613.29
3768.28
3811.20
3886.74
3990.74
2182.00
5737.10
2182.00
9458.00
3170.00
2078.00
7491.00
0.00
24379.00
2319.00
5512.30
2319.00
8423.00
2974.00
1884.00
6431.00
0.00
22031.00
9842.00
5210.70
5210.70
8538.00
2918.00
2198.00
7677.00
0.00
26541.70
16350.35
5176.17
5176.17
8308.02
2850.46
1942.46
6807.85
1.00
25085.96
22079.83
5197.48
5197.48
8342.23
2862.19
1950.46
6835.88
2.00
25190.25
26475.14
5251.81
5251.81
8429.43
2892.11
1970.85
6907.34
3.00
25454.54
30254.54
5351.06
5351.06
8588.72
2946.77
2008.09
7037.87
4.00
25936.51
33820.21
5484.28
5484.28
8802.55
3020.13
2058.08
7213.09
5.00
26583.14
4335.00
711.00
5528.00
5495.00
16069.00
4889.00
706.00
5129.00
4694.00
15418.00
5828.00
634.00
5154.00
6314.00
17930.00
4763.80
634.00
4974.53
5212.55
15584.89
4783.42
634.00
4995.02
5234.02
15646.45
4833.42
634.00
5047.23
5288.73
15803.38
4924.76
634.00
5142.61
5388.67
16090.04
5047.37
634.00
5270.64
5522.83
16474.84
Calculation of Invested Capital Operating Current Assets
Cash
Cash as percentage of revenue
Normal Cash
Accounts Receivable
Financing Receivables
Inventory
Other Current assets
Prepaid expenses
Current Operating Assets
Non Interest Bearing Current Liabilities
Accounts Payable
Taxes on Earnings
Deferred Revenue
Other Accrued Liabilities
Current Operating Liabilities
Net Operating Working Capital
8310.00
6613.00
8611.70
9501.07
9543.80
9651.16
9846.47
10108.30
Plus, Net Property Plant and Equipment
8510.00
8520.00
9886.00
6878.12
3772.05
2142.84
1288.82
841.70
Intangible Assets, Net
Capitalized PV of Operating Leases
Other Operating Assets
Plus, Other Operating Assets, net depreciation
2937.00
0.00
0.00
2937.00
2057.00
0.00
0.00
2057.00
1930.00
1544.00
1158.00
772.00
386.00
0.00
2113.26 2279.8659 2459.6095 2653.5241 2862.7269 3088.4231
0.00
0.00
0.00
0.00
0.00
0.00
4043.26
3823.87
3617.61
3425.52
3248.73
3088.42
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
19757.00
17190.00
22540.96
20203.06
16933.46
15219.53
14384.02
14038.42
2702.47
2479.71
19757.00
12.55%
2294.43
17190.00
13.35%
2613.29
22540.96
11.59%
3768.28
20203.06
18.65%
3811.20
16933.46
22.51%
3886.74
15219.53
25.54%
3990.74
14384.02
27.74%
19757.00 17190.00 22540.96 20203.06
12.55%
13.35%
11.59%
18.65%
8.28%
8.28%
8.28%
8.28%
842.91553 870.30548 745.85575 2094.5348
16933.46
22.51%
8.28%
2408.326
15219.53 14384.02
25.54%
27.74%
8.28%
8.28%
2625.863 2799.0807
3811.20
16933.46
15219.53
5525.13
3886.74
15219.53
14384.02
4722.25
LT deferred revenue
Other long term liabilities
LT Income Tax Liability
Less: Other Operating Liabilities
Invested Capital
Calculation of Return on Invested Capital
NOPLAT
Beginning Invested Capital
ROIC
Economic Profit: Begin IC * ( ROIC ‐WACC) Beginning Invested Capital
ROIC
WACC
Economic Profit FCF: NOPLAT+Change in Invested Capital
NOPLAT
Add: Beg Invested Capital
Less: Current Invested Capital
FCF
2702.47
2479.71
19757.00
17190.00
5046.71
2294.43
17190.00
22540.96
‐3056.53
2613.29
22540.96
20203.06
4951.19
3768.28
20203.06
16933.46
7037.88
3990.74
14384.02
14038.42
4336.33
Hewlett Packard Enterprise Company
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
Fiscal Years Ending Dec. 31
DCF Model
Discount period
NOPLAT Continuing Value Free Cash Flow
Net FCF
PV of free cash flows
Value of Operations
Non Operating Assets
Excess Cash
Value of Non Operating Assets
Non Operating Liabilities
PV of Operating Leases
PV of employee stock options
0.70%
27.74%
8.28%
10.87%
2016E
1
2
4951
4951
4572
55665
7038
7038
6002
5525
5525
4352
1
746
2
2095
3
2408
746
689
22541
55665
2095
1786
2408
1897
4631
4631
Value of Non Operating Liabilities
2113
48
691
2902
15103
3432
24290
Equity Value
Shares outstanding
Intrinsic Share Price
Current Share Price 36006
1743
20.66
16
Notes payable & short-term borrowings
Employee compensation & benefits
Long-term debt
Pension liabilities
Today
Next FYE
Last FYE
Days in FY
Days to FYE
Elapsed Fraction
Intrinsic Value Today
3887
51289
4722.3
56011
40739
2020E
5
3991
4336
4631
4631
36006
1743
20.66
16
Non Operating Liabilities
PV of Operating Leases
PV of employee stock options
2019E
4
3811
Equity Value
Shares outstanding
Intrinsic Share Price
Current Share Price Non Operating Assets
Excess Cash
Value of Non Operating Assets
3
3768
Value of Non Operating Liabilities
EP Model
Periods to discount
Economic Profit
Continuing Value
Net EP PV of Economic Profit
Initial Invested Capital
Value of Operations
2018E
2613
2113
48
691
2902
15103
3432
24290
Notes payable & short-term borrowings
Employee compensation & benefits
Long-term debt
Pension liabilities
2017E
4/19/2016
10/31/2016
10/31/2015
366
171
0.467
21.53
4
2626
36905
39531
28752
5
2799
Present Value of Operating Lease Obligations (2015)
Fiscal Years Ending Dec. 31
2016
2017
2018
2019
2020
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Operating
Leases
538
446
338
283
222
738
2565
452
2113
Hewlett Packard Enterprise Company
Weighted Average Cost of Capital (WACC) Estimation
Marginal Tax Rate
Cost of equity Calculation
Risk Free Rate +
Beta*
Market Risk Premium
= Cost of Equity
WACC Calculation
Shares outstanding*
MV of share
=Total MV of Equity [E]
MV of debt [D]
Cost of Debt
MV of equity
+
MV of debt
= MV of the firm [V]
Cost of Equity *
(E/V)
+
Cost of Debt *
(1‐Marginal tax Rate)
(D/V)
= WACC
21.40%
2.62%
1.65
5.00%
10.87%
1742.52
$15.68
$27,322.71
17216
5.32%
$27,322.71
17216.258
$44,538.97
10.87%
0.6134563
5.32%
78.60%
$0.39
8.28%
Hewlett Packard Enterprise Company
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
Period of Discount EPS
Key Assumptions
CV growth
CV ROE
Cost of Equity
2016E
2017E
2018E
2019E
2020E
1
2
3
4
5
$ 1.69 $ 1.83 $ 1.98 $ 2.16 $ 2.35
0.70%
8.26%
10.87%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Future Cash Flows
$ 0.22 $ 0.24 $ 0.26 $ 0.28
$ 0.22 $ 0.24 $ 0.26 $ 0.28 $ 21.16
Discounted Cash Flows
$ 0.20 $ 0.19 $ 0.19 $ 0.19 $ 14.01
Intrinsic Value
Price Today
$ 14.77
$15.68
Intrinsic Value Today
9.00
$ 2.35
$ 21.16
15.39
Hewlett Packard Enterprise Company
Relative Valuation Models
Ticker
EMC
WDC
STX
NTAP
IBM
HPQ
CSCO
VMW
HPE
Company
EMC Corp
Western Digital
Seagate Technology
NetApp
IBM
Hewlett Packard Inc,
Cisco
Vmware
Hewlett Packard Enterprise Company
Price
$26.50
$48.88
$34.64
$26.22
$ 138.19
$ 11.24
$ 26.77
$ 50.01
$15.68
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
EPS
2016E
$1.86 $5.89 $2.77 $2.17 $13.48 $1.59 $2.29 $4.11 $1.69 EPS
2017E
$1.96 $6.53 $3.44 $2.34 $14.16 $1.65 $2.39 $4.36 Average
P/E 16
14.2
8.3
12.5
12.1
10.3
7.1
11.7
12.2
11.0
P/E 17
13.5
7.5
10.1
11.2
9.8
6.8
11.2
11.5
10.2
$1.83 9.3 8.6
$ 18.70 $ 18.66
Relative Valuation Models
Ticker
CSC
WIT
INFY
HPE
Company
Computer Science Corporation
Wipro
Infosys
Hewlett Packard Enterprise
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
Price
$30.69
$11.95
$18.37
$15.68
EPS
2016E
$2.47 $0.55 $0.89 $1.69
$ 30.94 $ 30.86
EPS
2017E
P/E 16
P/E 17
$2.75 12.4 11.2
$0.59 21.7 20.3
$0.96 20.6 19.1
$1.83
18.3
16.8
$9.26
$8.56
Weights
Enterprise Group
0.7
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
Enterprise Services
0.3
$ 22.37
$ 22.32
Hewlett Packard Enterprise Company
Key Management Ratios
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Liquidity Ratios
Current Ratio (Current Assets/ Current Liabilities)
Cash Ratio (Cash/ Current Liabilities)
Quick Ratio (Cash + Other Liquid Assets) / current liabilities
1.17
0.10
0.56
1.11
0.12
0.54
1.41
0.44
0.83
1.84
0.83
1.25
2.13
1.12
1.54
2.34
1.33
1.75
2.51
1.49
1.92
2.65
1.63
2.05
Activity or Asset‐Management Ratios
Asset Turnover Ratio (Sales/Total Assets)
Inventory Turnover Ratio (Sales/Total Inventory)
Receivables Turnover Ratio (Sales/Average Accounts Receivable)
0.83
28
6.07
0.85
29
6.42
0.64
24
6.50
0.65
27
6.19
0.63
27
6.22
0.62
27
6.20
0.61
27
6.17
0.60
27
6.15
2%
56%
36.44
1%
57%
25.66
51%
42%
28.74
48%
45%
53.84
46%
47%
56.86
44%
48%
59.93
42%
49%
63.00
39%
51%
66.00
2.98%
5.34%
27.44%
5.15%
3.57%
2.53%
4.43%
28.37%
4.24%
2.99%
3.03%
7.26%
28.67%
2.92%
4.72%
3.67%
8.12%
28.62%
7.32%
5.65%
3.78%
8.12%
28.62%
7.73%
5.97%
3.90%
8.14%
28.62%
8.15%
6.30%
4.04%
8.20%
28.62%
8.57%
6.63%
4.17%
8.26%
28.62%
8.98%
6.95%
Payout Policy Ratios
Total Payout Ratio (Dividends paid + Repurchases)/NI
0
0
0
33.51%
32.32%
31.13%
29.91%
28.73%
Payout Ratio (Divident Payout Ratio)
0
0
0
12.99%
12.99%
12.99%
12.99%
12.99%
Financial Leverage Ratios
Debt‐to‐Equity Ratio (Total Debt/Total Equity)
Equity Ratio (Total Equity/ Total Assets)
Interest Coverage (Operating Income) / (Interest Expense)
Profitability Ratios
Return on Assets (Net Income/Total Assets)
Return on Equity (Net Income/Shareholders Equity)
Gross Margin (Revenue‐COGS)/Revenue
EBIT Margin (EBIT/Sales)
Profit Margin (Net Income/Sales)
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
Current Average Strike Price:
Cost of Equity:
Current Stock Price:
26
5.23
5
$ 26.06
10.87%
$15.68
2016E
2017E
2018E
2019E
2020E
2021E
2022E
Increase in Shares Outstanding:
Average Strike Price:
Increase in Common Stock Account:
5
5
5
5
5
5
5
$ 26.06 $ 26.06 $ 26.06 $ 26.06 $ 26.06 $ 26.06 $ 26.06
130 130 130 130 130 130 130
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
600
600
600
600
600
$ 15.68 $ 17.38 $ 19.27 $ 21.37 $ 23.69
38 35 31 28 25
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (end of the year)
1,743
1,709
1,680
1,654
1,631
5
5
5
5
5
38 35 31 28 25
1,709
1,680
1,654
1,631
1,610
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns
Range of
Outstanding Options
$0‐$9.99 $10‐$19.99 $20‐$29.99 $30‐$39.99 $40‐$49.99 $50‐$59.99 Total
Number
of Shares
0.211
7.366
10.851
6.776
0.813
0.161
26
HPE
$15.68
1.50%
1.68%
26.80%
Average
Exercise
Price
6.00
14.00
26.00
37.00
45.00
52.00
$ 26.06
Average
Remaining
Life (yrs)
4.00
4.80
4.90
6.80
1.40
2.20
5.23
B‐S
Option
Price
$ 9.08
$ 3.94
$ 1.15
$ 0.74
$ 0.00
$ 0.00
$ 1.62
Value
of Options
Granted
$ 2
$ 29
$ 12
$ 5
$ 0
$ 0
$ 48
Sensitivity Analysis
Beta
Risk Premium
20.66
4%
4.25%
5%
4.75%
5%
5.25%
6%
5.75%
6%
6.25%
0.8
40.65
39.36
38.13
36.96
35.85
34.79
33.78
32.81
31.89
31.01
1
35.85
34.53
33.29
32.12
31.01
29.97
28.97
28.03
27.13
26.27
1.2
31.89
30.59
29.36
28.21
27.13
26.11
25.14
24.23
23.36
22.54
1.4
28.59
27.31
26.11
24.99
23.94
22.95
22.02
21.14
20.31
19.53
1.65
25.14
23.90
22.75
21.67
20.66
19.72
18.84
18.01
17.22
16.49
1.8
23.36
22.15
21.02
19.97
18.99
18.08
17.22
16.42
15.66
14.95
2
21.26
20.09
18.99
17.98
17.04
16.16
15.34
14.57
13.85
13.17
20.66
0.00%
0.25%
0.50%
0.70%
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
0.8
32.23
33.41
34.71
35.85
37.73
39.49
41.46
43.69
46.22
49.12
1
28.25
29.16
30.16
31.01
32.42
33.72
35.16
36.75
38.53
40.53
1.2
24.98
25.69
26.47
27.13
28.21
29.19
30.27
31.45
32.76
34.20
1.4
22.23
22.80
23.41
23.94
24.78
25.54
26.37
27.27
28.25
29.33
1.65
19.36
19.80
20.27
20.66
21.30
21.87
22.48
23.14
23.85
24.62
1.8
17.88
18.26
18.66
18.99
19.53
20.02
20.53
21.09
21.68
22.32
56.39
61.05
48.36
20.66
6.00%
6.50%
7.00%
7.50%
8.28%
8.50%
9.00%
9.50%
10.00%
0%
30.04
27.07
24.52
22.30
19.38
18.65
17.12
15.75
14.52
0.25%
31.07
27.91
25.21
22.88
19.82
19.06
17.47
16.05
14.77
20.66
11%
12%
13%
14%
15.11%
16%
17%
18%
19%
20%
6%
51.91
47.35
42.78
38.22
33.15
29.08
24.52
19.95
15.38
10.82
6.50%
46.73
42.56
38.39
34.21
29.58
25.87
21.69
17.52
13.35
9.17
Beta
CV Growth
52.47
42.80
45.38
35.81
30.51
25.46
23.01
37.60
39.63
31.82
33.27
26.37
27.37
23.76
24.58
2
16.12
16.44
16.76
17.04
17.48
17.87
18.29
18.73
19.21
19.71
20.26
20.84
21.47
0.70%
33.17
29.60
26.59
24.02
20.68
19.86
18.15
16.63
15.27
1.00%
34.78
30.88
27.63
24.87
21.32
20.45
18.64
17.05
15.63
1.25%
36.27
32.06
28.57
25.64
21.89
20.97
19.08
17.42
15.94
1.50%
37.94
33.36
29.61
26.47
22.50
21.54
19.56
17.82
16.28
7.50%
38.64
35.08
31.52
27.96
24.01
20.84
17.28
13.71
10.15
6.59
8.28%
33.80
30.61
27.41
24.22
20.67
17.82
14.63
11.43
8.23
5.04
8.50%
32.61
29.51
26.40
23.29
19.84
17.08
13.97
10.87
7.76
4.66
9%
30.14
27.22
24.30
21.38
18.13
15.54
12.62
9.70
6.78
3.86
7.50%
40.56
33.44
23.08
19.19
12.07
4.95
‐2.17
‐9.30
‐16.42
8.28%
36.36
29.97
20.66
17.18
10.79
4.40
‐2.00
‐8.39
‐14.78
8.50%
35.33
29.11
20.07
16.69
10.48
4.26
‐1.95
‐8.16
‐14.37
9%
33.19
27.35
18.85
15.67
9.83
3.99
‐1.85
‐7.69
‐13.53
7.50%
79.94
62.13
44.33
23.10
8.71
‐9.10
‐26.90
8.28%
71.70
55.71
39.73
20.69
7.77
‐8.21
‐24.19
8.50%
69.67
54.14
38.61
20.10
7.55
‐7.98
‐23.52
9%
65.47
50.88
36.28
18.87
7.08
‐7.52
‐22.12
CV growth of NOPLAT
WACC
0.50%
32.19
28.81
25.95
23.50
20.28
19.49
17.84
16.36
15.04
WACC
SG&A
7%
42.37
38.53
34.68
30.84
26.57
23.15
19.31
15.47
11.62
7.78
WACC
Cost of products
20.66
20.00%
22.00%
24.91%
26.00%
28.00%
30.00%
32.00%
34.00%
36.00%
6%
52.22
43.09
29.80
24.82
15.69
6.56
‐2.57
‐11.71
‐20.84
6.50%
47.65
39.30
27.16
22.61
14.26
5.91
‐2.43
‐10.78
‐19.13
20.66
30%
35%
40%
45.96%
50%
55%
60%
6%
102.71
79.88
57.05
29.83
11.38
‐11.45
‐34.28
6.50%
93.79
72.93
52.06
27.19
10.32
‐10.54
‐31.41
7%
43.82
36.13
24.95
20.76
13.07
5.39
‐2.30
‐9.99
‐17.67
WACC
Cost of Services
7%
86.31
67.10
47.88
24.97
9.45
‐9.77
‐28.98
2.2
19.42
18.28
17.22
16.25
15.34
14.50
13.71
12.97
12.28
11.63
2.4
17.79
16.68
15.66
14.72
13.85
13.04
12.28
11.57
10.91
10.29
2.6
16.33
15.26
14.28
13.37
12.53
11.74
11.02
10.34
9.70
9.10