Hewlett Packard Enterprise Co Stock Appears To Be Fairly Valued
- By GF Value
The stock of Hewlett Packard Enterprise Co (NYSE:HPE, 30-year Financials) is estimated to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $16.02 per share and the market cap of $20.8 billion, Hewlett Packard Enterprise Co stock appears to be fairly valued. GF Value for Hewlett Packard Enterprise Co is shown in the chart below.
Because Hewlett Packard Enterprise Co is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 6.5% over the past five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Hewlett Packard Enterprise Co has a cash-to-debt ratio of 0.27, which ranks worse than 87% of the companies in Hardware industry. Based on this, GuruFocus ranks Hewlett Packard Enterprise Co's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Hewlett Packard Enterprise Co over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Hewlett Packard Enterprise Co has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $26.9 billion and loss of $0.34 a share. Its operating margin is 5.81%, which ranks in the middle range of the companies in Hardware industry. Overall, the profitability of Hewlett Packard Enterprise Co is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Hewlett Packard Enterprise Co over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Hewlett Packard Enterprise Co is 6.5%, which ranks better than 67% of the companies in Hardware industry. The 3-year average EBITDA growth rate is 3.3%, which ranks in the middle range of the companies in Hardware industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Hewlett Packard Enterprise Co's ROIC was 2.37, while its WACC came in at 5.92. The historical ROIC vs WACC comparison of Hewlett Packard Enterprise Co is shown below:
Overall, the stock of Hewlett Packard Enterprise Co (NYSE:HPE, 30-year Financials) is believed to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Hardware industry. To learn more about Hewlett Packard Enterprise Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
