Earnings

Comparing Hewlett Packard Enterprise Company (HPE) and Dell Technologies Inc. (DVMT)

Hewlett Packard Enterprise Company (NYSE:HPE) shares are up more than 4.71% this year and recently increased 0.64% or $0.09 to settle at $14.17. Dell Technologies Inc. (NYSE:DVMT), on the other hand, is up 35.47% year to date as of 12/05/2017. It currently trades at $74.87 and has returned -9.80% during the past week.

Hewlett Packard Enterprise Company (NYSE:HPE) and Dell Technologies Inc. (NYSE:DVMT) are the two most active stocks in the Diversified Computer Systems industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect HPE to grow earnings at a -7.77% annual rate over the next 5 years. Comparatively, DVMT is expected to grow at a 14.00% annual rate. All else equal, DVMT’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 2.28% for Dell Technologies Inc. (DVMT). HPE’s ROI is 2.10% while DVMT has a ROI of -3.10%. The interpretation is that HPE’s business generates a higher return on investment than DVMT’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. HPE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.01. Comparatively, DVMT’s free cash flow per share was +1.95. On a percent-of-sales basis, HPE’s free cash flow was -0.06% while DVMT converted 2.44% of its revenues into cash flow. This means that, for a given level of sales, DVMT is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. HPE has a current ratio of 1.30 compared to 0.80 for DVMT. This means that HPE can more easily cover its most immediate liabilities over the next twelve months. HPE’s debt-to-equity ratio is 0.57 versus a D/E of 4.48 for DVMT. DVMT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HPE trades at a forward P/E of 10.87, a P/B of 0.79, and a P/S of 0.79, compared to a P/B of 5.23, and a P/S of 0.21 for DVMT. HPE is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. HPE is currently priced at a -4.77% to its one-year price target of 14.88. Comparatively, DVMT is -16.81% relative to its price target of 90.00. This suggests that DVMT is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for HPE and 1.00 for DVMT, which implies that analysts are more bullish on the outlook for HPE.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. HPE has a short ratio of 2.65 compared to a short interest of 1.89 for DVMT. This implies that the market is currently less bearish on the outlook for DVMT.

Summary

Dell Technologies Inc. (NYSE:DVMT) beats Hewlett Packard Enterprise Company (NYSE:HPE) on a total of 8 of the 14 factors compared between the two stocks. DVMT is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, DVMT is the cheaper of the two stocks on an earnings and sales basis, DVMT is more undervalued relative to its price target. Finally, DVMT has better sentiment signals based on short interest.

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