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Cisco, HPE View: Overseas Cash Trumps Cautious Outlooks

Hewlett Packard Enterprise is among companies that could benefit from a tax break on repatriated cash. (AP)

Hewlett Packard Enterprises (HPE) and Cisco Systems (CSCO) are in the same boat amid light guidance heading into 2017: Investors will wait-and-see whether President-elect Donald Trump's proposed tax reform will enable them to bring back overseas cash for bigger stock buybacks.

HPE late Tuesday reported fiscal Q4 earnings that edged Wall Street estimates, but revenue and its current-quarter EPS guidance came in light. Shares initially fell, but closed strong to finish up 2.9%, at 23.54, in the stock market today. That's just shy of a 23.63 buy point from a cup base. HPE topped that entry point a few times in the past two weeks, hitting an all-time intraday high of 23.85 on Friday, but hasn't closed in buy range.

Trump has proposed a one-time tax cut for the repatriation of U.S. companies' corporate profits held overseas, with tax rates falling from 35% to 10%. The top five overseas cash holders are Apple (AAPL), Microsoft (MSFT), Google-parent Alphabet (GOOGL), Cisco and Oracle (ORCL).

"HPE's Q4 results reflect challenges similar to those at Cisco: mixed regional execution but overall stable demand in the United States and some weakness in the United Kingdom," said Alex Kurtz, an analyst at Pacific Crest Securities, in a research report. "A key catalyst is the potential treatment of its foreign cash under the new U.S. administration and how this could affect buybacks and/or M&A next year."


IBD'S TAKE:  Of the three large cap stocks in IBD's Computer-Tech Services group, HPE has the highest Composite Rating, a metric in CANSLIM investing. HPE's CR is 80 out of a possible 99, while Accenture's is 73 and IBM follows at 52. CACI International has a CR of 90, but it trades in low volume.


Jason Ader, a William Blair analyst, had a similar view after Cisco reported fiscal Q1 earnings on Nov. 17. "Cisco has one of the largest overseas cash hoards at roughly $60 billion and has been a poster child for repatriation and corporate tax reform. At the very least, we expect Cisco could use repatriated cash to buy back stock and/or increase the dividend, which could boost shares," he wrote last week.

Cisco guided to January-quarter earnings per share of 56 cents vs. consensus estimate of 59 cents.

HPE said non-GAAP earnings rose 17% to 61 cents in the three months ended Oct. 31, while revenue, adjusted for divestitures and currency, fell 7% to $12.5 billion. Analysts polled by Thomson Reuters had projected 60 cents and $12.8 billion.

In the current quarter, HPE forecast profit of 44 cents at the midpoint of its guidance vs. consensus estimates of 46 cents.

On  its earnings call, HPE told analysts that server revenue fell 6% and networking sales were flat, but solid-state flash storage was a bright spot, up 100% year over and now at an annual run-rate of $750 million.

HPE might have lost share in the server market to Cisco, said a Jefferies report.

HPE in May said it would spin off and merge its enterprise-services division with Computer Sciences Corp. (CSC). Then in September, HPE said it would spin off its software business and merge it with U.K.-based Micro Focus International

"Ahead of its pending divestiture, enterprise services posted a good quarter, with better-than-expected revenues and a strong margin performance," said Tim Long, a BMO Capital Markets analyst, in a report. "Within enterprise group, high-margin technology services revenues were also a bit better, an encouraging sign as HPE transitions itself."

Wrote Citigroup analyst Jim Suva in his report: "While there are many moving parts to the business, we believe investors are under-appreciating the FCF (free cash flow) generation and net cash improvement for HPE" since the former Hewlett-Packard split into two companies, HPE and the PC/printer company HP Inc., last November.

Mizuho on Wednesday hiked its price target on Hewlett Packard Enterprise stock to 22 from 20.

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