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Hewlett-Packard Co Enterprise’s Spin Steals The Show: Analysts

Hewlett-Packard Enterprise shares surged on Wednesday following the company’s latest earnings report and announcement about its plan to spin off its Enterprise Services business into a merger with Computer Sciences Corporation. Analysts are especially positive on the decision to monetize the Services business. Shares of Computer Sciences reacted even more strongly to the news, skyrocketing by as much as 34.31% to $47.88 on the news.

Hewlett-Packard Co Enterprise's Spin Steals The Show: Analysts

Hewlett-Packard Enterprise posts solid results

Hewlett-Packard Enterprise posted $12.7 billion in revenue and 42 cents in adjusted earnings for the second quarter of its fiscal 2016, coming out ahead of consensus on revenue and in line on earnings. In the earnings part of this morning’s announcement, the big story was Server and Enterprise revenue, according to Stifel analyst Aaron Rakers, as it was better than expected. Management’s guidance for the third fiscal quarter came up light of consensus at a range of 42 cents to 46 cents per share, compared to the consensus of 48 cents, although their guide includes an impact of 3 to 4 cents per share from the H3C divesture.

The surprise announcement this morning came in the deal between HPE and Computer Sciences. The $8.5 billion deal is expected to be tax-free and involves spinning off the Enterprise Services division to the company. The deal consists of a $4.5 billion equity stake for Hewlett-Packard Enterprise shareholders plus a $1.5 billion one-tie cash dividend and $2.5 billion in assumed debt or other liabilities. The deal is expected to close by March 2017 and generate about $1 billion in cost synergies within the first year, noted Rakers, who believes the spin-merger will “leave investors incrementally focused on HPE’s appetite for larger/ strategic acquisitions.”

Rakers maintained his Hold Rating on HPE.

Hewlett-Packard Enterprise price target upped

BMO Capital Markets analyst Tim Long bumped up his price target for Hewlett-Packard Enterprises from $23 to $24 per share and maintained his Outperform rating. He said that the $8.5 billion in expected consideration for shareholders now appears to be $1 billion or more higher based on the initial reaction in Computer Sciences’ stock.

He sees the merger-spin as a big positive and believe that the businesses which are left under the HPE umbrella will receive a higher multiple because they have better margins and cash flow. He pegs the deal’s value to shareholders at more than $6 per share. In addition to the cost synergies, he believes the deal will “provide a longer tail to the capital return program as cash is increasing and debt is being lowered.”