Hewlett Packard Enterprise risk-reward attractive at current levels says Bernstein analyst

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By Sam Boughedda

Bernstein maintained an Outperform rating and $20 price target on Hewlett Packard Enterprise (NYSE:HPE) in a note Wednesday.

The analysts, reacting to the news that HPE exercised its put option to sell its 49% minority stake in H3C to Unisplendour International Technology Limited, told investors that HPE's relationship with H3C impacts its financials in two ways.

HPE sold the minority stake for 15x its trailing 12-month post-tax profit, or $3.9 billion. The exact price is expected to be finalized over the next 30 days, with the deal expected to close in 2023.

The analysts explained that the first way HPE's financials are impacted is because it sells servers and storage to H3C, which are rebranded and sold in China, with total revenues to HPE of $848 million in FY 22. In addition, they explained that HPE "recognizes 49% of H3C's total net income below the operating segment line, within "Other Income", which amounted to $265M in FY 22 (and $257M in FY 21)."

"Upon closing, HPE's commercial arrangement to sell equipment to H3C will remain intact (no initial impact to HPE revenues), but HPE's operating profits and EPS will decrease by about 8% (lost H3C dividends, offset by some incremental interest income)," wrote the analysts. "HPE arguably had a privileged position in China - a unique JV with an SOE to sell enterprise equipment - but we suspect that the unpredictable nature of U.S.-Chinese relations/politics ultimately tilted the scale for HP to exercise its put."

Even so, Bernstein sees the risk-reward on HPE at current levels as attractive and believes the company's decision to exercise its H3C put "creates increased financial flexibility and optionality going forward."

Elsewhere on Wednesday, Morgan Stanley analysts said in a memo that the firm views the transaction as a "slight positive."

Even though it exits the company from its China opportunity, the deal offers clarity on the situation investors were increasingly cautious about, said the analysts, who maintained an Underweight rating and a $13 price target on the stock.

The analysts explained further: "While H3C investment gave HPE exposure to China market, unique to U.S.-based networking companies, the company had not been receiving meaningful investor credit for this investment given uncertainty of agreement."

"While the amount and timing of cash flow to be received uncertain, given opportunities for strategic activity currently, investors likely to view increased availability of cash as a positive for HPE in the near term."