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Hewlett Packard Enterprise (HPE) Q4 Earnings: What's Up?

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Hewlett Packard Enterprise Company (HPE - Free Report) is set to report fourth-quarter fiscal 2016 results on Nov 22. Last quarter, the company had posted a positive earnings surprise of 8.89%.

It should be noted that with the end of the fourth quarter on Oct 31, the company completed one year of operation following the split from its parent Hewlett-Packard Company.

Prior to the split, Hewlett-Packard Company was a leading global provider of computing products, technologies, software and services to individual consumers, SMBs and large enterprises, including those operating in the public and educational sectors. Products like PCs and access devices, imaging and printing-related products and services, enterprise IT infrastructure, and multi-vendor customer services including support, maintenance, consulting, integration and outsourcing comprised its offerings.

Post the split, Hewlett-Packard Company’s PC and printer business operates under the name HP Inc. (HPQ - Free Report) , while Hewlett Packard Enterprise offers commercial tech products.

Factors to Consider

We believe that the parent company’s (Hewlett-Packard Company) initiative to split the business has started benefiting Hewlett Packard Enterprise. In our opinion, a split allows a customized approach to two different businesses, which might not have been possible if they operate as a single entity.

Hewlett Packard Enterprise has done reasonably well in enterprise class server, storage market, networking and related services, and it intends to maintain its focus on these fast-growing and higher-margin businesses.

Since the split Hewlett Packard Enterprise’s Chief Operating Officer (CEO), Meg Whitman, has been looking to reduce the company’s large portfolio of non-core businesses that are now struggling to maintain their growth trajectory.

In keeping with this effort, the company, in September this year, announced that it will spin off the software business and merge the same with British software firm, Micro Focus International Plc, in a cash-stock deal worth $8.8 billion.

The transaction, which is subject to certain regulatory approvals, is anticipated to be tax free for the company. Per the agreement, the company will receive $2.5 billion in cash and a 50.1% stake in the merged entity, which is currently estimated to be worth $6.3 billion.

Also, Hewlett Packard Enterprise completed the sale of 84% of its 60.5% equity stake in Mphasis Limited, an IT service provider in Bangalore, India, to The Blackstone Group in September. The transaction has fetched the company around $700 million.

Furthermore, this May, it announced the spin-off of its struggling IT services segment – Enterprise Services – and entered into an agreement to merge the same with Computer Sciences Corp.

The primary motive behind such a massive restructuring drive is to reassure investors of the company’s sustained focus on improving profitability and returning value to shareholders in the form of dividend and share repurchases.

We believe that Hewlett Packard Enterprise’s ongoing business overhaul will yield long-term benefits by supporting innovation and leading to cost savings.

We also believe that successful deployment of the company’s products will boost its top line, going forward.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines and Oracle add to its woes.

Earnings Whispers

Our proven model does not conclusively show that Hewlett Packard Enterprise is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP: Earnings ESP for Hewlett Packard Enterprise is 0.00% since the Most Accurate estimate of 61 cents stands in line with the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Hewlett Packard Enterprise’s Zacks Rank #3, when combined with a 0.00% ESP, makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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Stocks to Consider

Here are a couple of companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat:

Palo Alto Networks (PANW - Free Report) has an Earnings ESP of +14.82% and a Zacks Rank #3.You can see the complete list of today’s Zacks #1 Rank stocks here.

Broadcom Ltd. (AVGO - Free Report) has an Earnings ESP of +1.74% and a Zacks Rank #3.

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