HP Enterprise Cash Flow Generation 'Under Appreciated,' Says Citi

Hewlett Packard Enterprise Co (NYSE: HPE) is in the process of spinning off its Services segment. Investors seem to be underappreciating the FCF generation and net cash improvement in 2H16 and 2017, Citi’s Jim Suva said in a report. He upgraded the rating on the company from Neutral to Buy, while raising the price target from $20 to $25.

HP Enterprise is to receive cash of $1.5bn, while Computer Sciences Corporation (NYSE: CSC) will assume debt of ~$2.5bn. The deal has HP Enterprise shareholders receiving stock equating to 50 percent of the combined company’s market cap. “Our analysis suggests a ~$3 incremental value to core HPE from the deal,” analyst Jim Suva wrote.

Investment Thesis

The revised price target still reflects a significant discount of 40 percent to peer multiples for core HP Enterprise, including Enterprise Group and Software, and a value of ~$3 for the Services segment.

Related Link: Hewlett Packard Enterprise Said to be Considering Sale of Some Software Assets -Bloomberg

“While there are many moving parts to the business with divestitures, accelerated restructuring and separation payments in FY2016/FY2017, we believe investors are underappreciating the FCF generation and net cash improvement for HPE in 2H'16 and 2017 (post the spinoff),” Suva commented.

The normalized FCF of the core business is estimated at around $3 billion. With this improved FCF conversion profile, HP Enterprise could double its dividend payouts, from $0.22 to $0.46, after the Services spin off.

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