The Ratings Game: HPE is undertaking another reorganization after a lousy quarter, to the chagrin of analysts

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Hewlett Packard Enterprise Co. has been down this restructuring road before.

In announcing a three-year “Cost Optimization and Prioritization Plan” Thursday to save more than $1 billion after a lousy quarter hit by the COVID-19 pandemic, executives of the information technology company HPE, -11.48% announced their latest scheme to cut costs — much to the chagrin of Wall Street analysis.

HPE shares are down 11% at midsession Friday.

See also: HPE loses more than $800 million as sales slump, CEO blames coronavirus ‘economic lockdowns’

A.B. Bernstein analyst Toni Sacconaghi, who pointedly pressed HPE Chief Executive Antonio Neri on the topic, led the skepticism during a conference call with analysts late Thursday. Subsequently, several analysts expressed frustration over yet another organizational reboot in some stinging notes.

“Another Re-Organization, Further Reducing Footprint, Still No Product Story,” Susquehanna International Group’s Mehdi Hosseini lamented in a note that retained a neutral rating and price target to $10. He is one of at least 10 analysts who have reduced their price target on HPE since March and the spread of COVID-19.

HPE reported a loss of $821 million, or 64 cents a share, on revenue of $6.01 billion, down 16% from $7.15 billion a year ago. After adjustments for an $865 million impairment charge and other effects, the company reported earnings of 22 cents a share, down from adjusted earnings of 42 cents a share a year ago. Analysts surveyed by FactSet had expected adjusted earnings of 30 cents a share on sales of $6.33 billion.

The company, which pointed to supply chain constraints as part of the problem, offered no financial guidance for the current quarter or fiscal year.

Neri, who attributed a downturn in sales last year to lowered IT demand, has overseen some cost-cutting plan or another since he succeeded Meg Whitman as CEO in November 2017. Two months earlier, Whitman said the company had the opportunity to create a structure and operating model that is “simpler, nimbler and faster,” and it will begin a program called HPE Next to “simplify how we work.”

See also: Opinion: HP Enterprise has yet another confusing plan to simplify itself

Ongoing efforts to pare costs haven’t led to a bounce in profits or HPE’s stock. It’s down 42% in 2020, and more than half since March 9, 2018. The S&P 500 index SPX, +0.23% is down 9% this year but up 5.5% since March 9, 2018.

“HPE Next 2.0 – Will This Be Any Different?” groused Evercore ISI analyst Amit Daryanani, who remains steady on HPE stock with an inline rating and $11 price target.

“The risk here could be that HPE needs to execute an aggressive cost reduction plan to stabilize their opex run-rate in light of a muted revenue expectation given accelerated shift towards a cloud first environment and uptick in competition from DELL DELL, -3.08% and Lenovo,” Daryanani wrote late Thursday.

The outlook was dire enough for Barclays’ Tim Long to lower his earnings per share estimate for FY20/F21 from $1.38/$1.40 to $1.16/$1.29. HPE did not offer guidance for its current quarter or fiscal year. Consequently, Long lowered his price target on HPE to $9 from $10, based on an unchanged PE multiple of 7x our FY21 EPS estimate. Long maintains an equal weight rating.

There was a ray of optimism from RBC Capital Markets’ Robert Muller. He believes HPE’s rising backlog could “provide a tailwind as HPE unwinds its order book (if cancellations do not occur)”. And he noted a “modest” revenue decline of 2% for Intelligent Edge, the company’s data-analysis tool, to $665 million with operating margins of 11% — above his 6.5% estimate.

Nonetheless, he remains cautious for now because of uncertainty over COVID-19 and a difficult sales environment. Muller maintains a perform rating on HPE shares with a price target of $11.

Hewlett Packard Enterprise was founded in November 2015 as part of the splitting of the original Hewlett-Packard company. The split was structured so that the former Hewlett-Packard Company changed its name HP Inc. HPQ, -0.99% and retained the old HP’s personal computer and printing business, while the newly created company HPE focused on servers, storage, networking, consulting and support.

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