(Update - 12/4/18 4 PM ET)
Hewlett Packard Enterprise (HPE) has experienced volatile, two-way price swings over the last six months. But the company’s strong earnings performances do not match the downside activity which has been present during this period and the next catalyst for upside moves in HPE share prices might be encountered with the company’s next earnings release. The stock’s supreme dividend yield is well above the 1.11% dividend average for the technology sector, and the company’s continued revenue growth rates suggest that recent declines in share prices are unjustified. This sets the stage for a bullish reversal heading into 2019, and HPE must remain on the radar for income-oriented investors looking to build exposure in the technology sector.
Excluding items, the company posted earnings of $0.44 per share during the third quarter, which beat analyst estimates of $0.37 per share. Revenues came in at $7.76 billion, which also beat expectations of $7.68 billion. These performances indicate a 3.5% annualized gain in revenues and a period of stable growth for the company.
(Source: Market Realist)
Despite these strong performances, shares of HPE fell in the months that followed. Weaker sales expectations in specified areas for traditional computing units can be isolated as a drag on sentiment. But the real reasons for declining valuations in HPE shares seem to be coming from the underlying trends building in the broader market and technology stocks have traded under heavy bearish pressure in the second half of this year.
Interestingly, stock performances for Hewlett Packard Enterprise seem to be working as a leading indicator of the trends which are likely to follow in the technology sector as a whole. Clear divergences have been present when comparing earnings results and stock performance in HPE. But it looks as though this selling pressure may have come as the result of position instability within the entire sector. In other words, HPE shareholders may have simply been an early casualty of all stock declines which were ready to commence.
Fortunately, these declines may have created new buying opportunities and the depressed share prices of HPE might represent one of the best examples of value visible in the space. Over the last year, long positions in HPE have generated gains of only 3.88% (excluding dividends). This performance is well below the 8.92% gains seen in the Total Market Index Information Technology Index (^SPTMIFT) and even farther below the 19.75% gains generated by the S&P/TSX Capped Information Technology Index (^SPTTTK) during this period.
The next catalyst for upside moves in HPE share prices might be encountered with the company’s next earnings release. Hewlett Packard Enterprise is scheduled to report earnings on December 4th. For the fiscal fourth quarter, the company is expected to show earnings of $0.43 per share. If realized, this would mark an annualized gain of 48.28% (relative to the earnings performance of $0.29 posted during the same period last year). Over the last four quarters, Hewlett Packard Enterprise has managed to beat consensus estimates on every occasion (by an average of 19.22%). Revenues are expected to come in at $7.85 billion. If realized, this would mark an annualized gain of 2.5%.
In the chart above, it is clear that the company has a strong history of beating analyst expectations for earnings. Hewlett Packard Enterprise performances are tend to move in line with sales of devices which run on the Windows 10 operating system produced by Microsoft (MSFT), and earnings should continue to be supported as users upgrade from outdated versions of the software. For many users (personal and commercial), this transition has been slow. This is especially when compared to some of the prior upgrades in the Windows operating systems. If these factors help bottom-line figures, we could see another earnings beat from the company in its next release.
The stock has posted steady declines since the beginning of March but price action has started to stabilize at these lower levels. On several occasions, HPE has bounced from price support near $14.50 per share. At current price levels, the stock would only need to experience a price decline of 3.33% in order to reach these areas once again. Ultimately, this suggests the stock is unlikely to continue declining and a bullish earnings catalyst could produce an upside reversal near-term.
(Source: Seeking Alpha)
For shareholders, another potential benefit can be found in the stock’s supreme dividend yield. Long positions in HPE come with an annualized dividend of $0.45 per share. This equates to a dividend yield of 3.00%, which is firmly the averages seen in the S&P 500 and almost three-times the dividend yield averages seen within the technology sector (1.11%). The company stands to benefit from the strong consumer spending trends which have been generated by record-low unemployment and heightened consumer confidence levels in the U.S. economy. This suggests that the market’s earnings outlook for Hewlett Packard Enterprise may be lower than the company’s next set of earnings results. The stock’s dividend payout ratio currently stands at 29.2%, and this suggests a margin of safety which dividend increases in the quarters ahead. As a result, the company’s continued revenue growth rates suggest that declines in share prices are unjustified and this sets the stage for a bullish reversal heading into 2019.
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Disclosure: I am/we are long HPE, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.