Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Gaurav Ghantkar [Gauravarvind-sinaighantkar@uiowa.edu]

Hewlett Packard Enterprise Company (HPE) March 09, 2016

Information Technology – Enterprise Solutions Stock Rating Buy

Investment Thesis Target Price $20.76-$23.90 Hewlett Packard Enterprise is a leader in providing end-to-end enterprise solutions. It came into existence on 1 November 2015 as a spin-off from the parent HPQ. Our valuation models indicate that the stock is undervalued and we believe that the market has not correctly factored in its value. We have assigned a BUY rating. Drivers of Thesis

Strong Servers and Storage Revenue Expectations: A leaner organization focused on core competencies of network storage and servers, coupled with an exit from loss leading services such as public cloud product, Helion, will spur revenue growth. We expect Servers and Storage revenue to grow 2.71% and 3.19% respectively in 2016.

Strategic Acquisitions: Key strategic acquisition such as that of Aruba has added to the portfolio of offerings and is in line with HPE’s core products. We expect the synergy to draw in strong revenues in the foreseeable future. We estimate a healthy revenue growth at 3.19% in 2016 and the growth to pick up thereafter.

Returning Value to Stockholders: Emphasis on returning value to stockholders. Management has recently announced a quarterly dividend of 5.5 cents per share. Further a $3 billion stock buyback is in line without a particular expiration date.

Research and Development culture: A strong culture of innovation backed up by a significant investment in R&D to the tune of $2.3 in fiscal 2015, $2.2 in 2014, and $2.0 in 2013.

Risks to Thesis

Currency Headwinds: Currency pressure will remain a headwind as 61% of revenues come from outside US and hence HPE is susceptible to foreign currency fluctuations

Fed Funds Rate: An increase in fed funds rate will increase borrowing costs and put a downward pressure on demand for enterprise service products and solutions.

Henry Fund DCF $20.76 Henry Fund DDM $14.79 Relative Multiple $22.25 Price Data Current Price $15.68 52wk Range $11.63 – 18.50 Consensus 1yr Target $16.07 Key Statistics Market Cap (B) $23.58 Shares Outstanding (M) 1742 Institutional Ownership 37.8% Five Year Beta 1.65 Dividend Yield 1.68% Est. 5yr Growth 0.7% Price/Earnings (TTM) 11.66 Price/Earnings (FY1) 08.00 Price/Sales (TTM) 0.52 Price/Book (mkt) 0.76 Profitability Operating Margin 6.21% Profit Margin 4.75% Return on Assets (TTM) 3.36% Return on Equity (TTM) 7.00%

Earnings Estimates Year 2013 2014 2015 2016E 2017E 2018E

EPS $1.18 $0.95 $1.36 $1.69 $1.83 $1.98

growth 113.89% -19.65% 43.80% 24.26% 8.28% 8.19%

6 Month Performance Company Description

Hewlett Packard Enterprise Company provides total enterprise solutions spanning areas ranging from Servers, Storage, Networking, Information Technology Software and Services to customized Financing Solutions. The company is organized into 5 segments namely Enterprise Group, Software, Enterprise Services, Financial Services and Corporate Investments. Hewlett Packard Enterprise was spun off from HP Inc., the parent company on November 1, 2015.

11.0

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17.6

23.8

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P/E ROE EV/EBITDA

HPE Industry Sector

-10%

-5%

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O N D J F

HPE S&P 500Source:Yahoo

Source:

Factset

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EXECUTIVE SUMMARY

Hewlett Packard Enterprise (HPE) provides total enterprise solutions. They are a major player in the storage industry and are the closest competitor to Cisco in the Networking solutions domain. The recent spin-off of HPE from the parent has brought about a greater clarity of the business. Further, by exiting from loss leaders such as public cloud, the management has put significant efforts to bring in a more conservative, leaner and disciplined strategy that is aligned with HPE’s core competencies of storage, servers, networking and hybrid cloud services.

A key strategic decision by HPE has been its partnership with Microsoft in the public cloud domain. By partnering with a flagship Microsoft product such as Azure, the motto of HPE has been “If you cannot beat them join them.”

Further the acquisition of Aruba for $3B in May 2015 has added to its portfolio of offerings in the mobile WLAN space.

While M&A has been a part of HPE, there has been significant talk by the CEO, Meg Whitman, about organic growth and investment in R&D, necessary to add value to the organization.

We estimate Enterprise Group and Software segment to grow at 2.96% and 3.49% in 2016 and 2017 respectively. Enterprise Group that caters to the core products of HPE is likely to see strong sales due to its niche products and also due to the sales of Aruba products post its acquisition by HPE. We expect the negative growth trends to continue for Enterprise services and Financial Services segment and expect the segments to contract at -5.46% and -5.46% in 2016. Our projections indicate that the cumulative negative top line growth of recent years to continue into 2016 at a growth rate of -0.66%, while we expect year 2017 to set HPE on the path of a healthy fiscal recovery at a growth rate of 0.41% and the growth to pick up thereafter.

We believe the intrinsic stock value is most closely approximated by the DCF valuation, which presents a value of $21.52, as it most closely captures the revenue decomposition and growth forecasts of the different segments of business. The stock currently trades for around $15.68 and thus we estimate an upside of 37% that can be captured in the long run. We believe this is a value stock and hence we have given a BUY rating to the stock.

COMPANY DESCRIPTION

Hewlett Packard Enterprise Co. is the provider of technology solutions customers need to optimize their traditional information technology while helping them build the secure, cloud-enabled, mobile-ready future that is suited to their needs. It offers servers, storage, networking, converged systems, software and services, combined with its financing solutions. Hewlett Packard Enterprise was founded on November 1, 2015 and is headquartered in Palo Alto, CA. 9

Geography

HPE has a large geographical presence across the world, coupled with a third of their revenues coming from the domestic market. They are strongly established in UK and Germany in Europe, while Japan, China and India are strong revenue contributors in Asia. The strong overseas presence makes HPE susceptible to foreign currency fluctuations. However, HPE uses forwards, swaps and options to hedge against currency risk. The strengthening dollar in recent months has hampered the exports of HPE products and are thus constant currency adjusted for the purpose of analysis. A breakup of their revenue can be seen below:

Source: FactSet

Segments

The major segments of HPE are Enterprise Group and Enterprise Services that together account for 88% of the revenue. These division also hone the best products of HPE and are the core revenue generators.

39%

11%10%4%3%

33%

Revenue Breakdown

United States China UK Japan Germany Other

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Source: FactSet

HPE caters to five divisions as follows:

Enterprise Group

This segment provides a broad range of technology solutions such as Servers, Storage, Networking and Technology Services. This segment accounts for 53% of the revenue. We estimate that this segment will show a growth of 2.2%, 2.22% and 1.71% in 2015, 2016 and 2017 respectively. The split for the individual sub-segments are discussed below. The growth forecasts are in line with industry forecasts. While, this segment hones some of the best and premium products of HPE, the pricing power of the rivals have put a downward pressure on the products. Hence we make use of modest growth forecasts as mentioned above.

HP Servers

HPE Servers offers both Industry Standard Servers ("ISS") as well as Business Critical Systems ("BCS") to address the full array of customers' compute needs. These servers typically run Windows, Linux and virtualization platforms while leveraging x86 processors. 1

HPE is likely to take a hit in the public cloud computing services segment, in which they had competed directly with Amazon, Microsoft. By announcing the closure of their flagship public cloud product HPE Helion in Jan 2016, HPE has chosen to focus more on their core competency and do what they do best, i.e. traditional storage devices. Further enterprises are choosing a combination of public cloud and traditional storage- a term that is referred to as hybrid cloud. By partnering with public cloud players such as Amazon and Microsoft, HPE is perfectly positioned to capture value in the hybrid cloud market and cater to

enterprises that are hesitant to trust all their data to public cloud due to security concerns. The downside of this is their inability to capitalize on the public cloud storage market, an area in which we are seeing increasing industry trends to capture the market space by the bigger players in the industry.

We estimate server segment to grow at 2.71%, 2.56% and 1.26% in 2016, 2017 and 2018 respectively and believe HPE will follow the industry growth trends in the server market as seen below:

Source: Statista

Storage

This section caters to small and medium size enterprises. The flagship HPE product in this area is the 3 PAR. StoreServ Storage Platform, which is designed for virtualization, cloud and IT-as-a-service. Traditional Storage solutions include tape, storage networking and legacy external disk products such as EVA and XP 1

We estimate the storage sub-segment to grow at 3.19% in 2016 and the growth to pick up thereafter at 3.53% and 4.05% in 2017 and 2018 respectively.

Networking

This sections includes include switches, routers, wireless local area network ("WLAN") and network management products that deliver open, scalable, secure, agile and consistent solutions. 1

By acquiring Aruba Networks, an industry leader in wireless networking (WLAN), for $3 billion in Mar 2015,

52%36%

6%6%

REVENUE BY SEGMENT

Enterprise Group Enterprise Services Software Other

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HPE has chosen to enter the enterprise mobility market. The acquisition has been financed by cash and debt. The synergies resulting from this acquisition has perfectly positioned HPE to capture the IT mobility market. This acquisition, we believe, is a defining moment for HPE as the two companies cater to a complementary set of products and the consolidation of the two has resulted in propelling HPE to the position of market leaders in the space.

Market Leadership Chart

Source: Gartner

Historically Aruba has posted a compounded annual growth rate of 30 percent for five years prior to the acquisition. In 2014, it reported a revenue of $729 million. (25) Thus it contributes to roughly 25 percent of the networking revenues. Post the acquisition, we estimate the networking sub-segment to grow at 3.19%, 3.53% and 4.05% in 2016, 2017 and 2018 respectively as we expect healthy sales of Aruba products to contribute to the Networking Revenue.

Technology Services

This section provides Support and Consulting Services. The services offered are HPE Foundation Care that caters to hardware and software support services; HPE Proactive Care that provides access to technical experts; HPE

Datacenter Care that caters to hybrid cloud environments; Lifecycle Event Services that offer expertise on each phase of technology lifecycle 1

Software

This segment provides big data analytics and applications, enterprise security, application testing and delivery management and IT operations management solutions for businesses and other enterprises of all sizes. The software offerings includes licenses, support, and professional services 1

This segment contributed to 7% of the top line in 2015, thus contributing modestly to the total revenue. While the segment does not cater to the core competency of HPE, it is instrumental nonetheless in the branding of HPE as a total enterprise solution. The segment has shown a decreasing trend in 2014 and 2015 dropping by a margin of 2.53% and 7.91% respectively. However, we believe the sales in this segment will pick up in foreseeable future and the segment growth will match the industry average of 3.49% in 2016.

Source: Statista 4

Big data

This section helps organizations capture, store, explore, analyze, protect and share information. 1

Application Delivery Management

This section provides software that help organizations deliver high performance applications. 1

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Enterprise Security

This is designed to disrupt fraud, hackers and cyber criminals by testing and scanning software and websites for security vulnerabilities, improving network defenses and security, and implementing security controls 1

IT operations management

This section provides the software required to automate routine IT tasks and to pinpoint IT problems as they occur1

Enterprise Services

ES provides technology consulting, outsourcing and support services across infrastructure, applications and business process domains in traditional and Strategic Enterprise Service offerings which includes analytics and data management, security and cloud services 1

Infrastructure Technology Outsourcing

This section helps optimize clients’ technology infrastructure and encompasses the management of data centers, IT security, cloud computing, workplace technology, networks, unified communications. 1

The segment saw demand weakening in 2015, dropping by a whopping 13%. We expect the negative trend to trickle into the coming few years and hence we have negative projections for this segment till 2020. We see a time horizon of 2020 when the segment will show modest growth of 0.7%.

Application and Business Services

This section caters to traditional IT services including application development, maintenance, testing and integration for both custom and packaged solutions.

The sub-segment witnessed decreasing trend in 2014 and 2015, dropping by 8 percent in 2015. However we expect this sub-segment to grow by industry averages of 3.49%, 3.34% and 3.39% in 2016, 2017 and 2018 respectively.

Financial Services

This segment is designed to help provides flexible investment solutions for the customers—such as leasing, financing, IT consumption and utility programs—and asset management services1. This spans areas including hardware, software and IT solutions.

The segment tries to meet the investment demands of corporations in order to fund their purchase of HPE products. The segment saw a drop of 8 percent in 2015. We expect this negative growth trend to continue in the foreseeable future. Hence we estimate a negative growth of 5.46%, 2.86% and 0.26% in 2016, 2017 and 2018 respectively. Further, we expect a positive growth in year 2019 and 2020. We have incorporated these growth forecasts in our model.

Corporate Investments

This segment includes the research and developments labs and are the source of HPE’s innovative and flagship products. This division is crucial for HPE to retain its differentiation and product leadership. The R&D expenses over the past few years have been a healthy 2 billion.

We have grown this segment using the historical trends and estimate a growth of 12.5 percent Compounded Annual Growth Rate till 2020.

RECENT DEVELOPMENTS

FY 2016 Q1 Results

On 3rd March 2016 HPE posted adjusted fiscal first-quarter

earnings of 41 cents per share on $12.72 billion in revenue.

Analysts had expected HPE to report earnings of about 40

cents a share on $12.68 billion in revenue, according to a

consensus estimate. On a constant currency basis, first-

quarter revenue increased 4 percent from the year-earlier

period, but it fell about 3 percent without accounting for

shifts in the U.S. dollar (14). $1.3 B has been returned to

shareholders in the form of share repurchases and

dividends. (32)

The results saw Enterprise Group and Financial Services

segment showing a positive revenue growth of 7% (1% Y/Y

unadjusted) and 3%(-3% Y/Y unadjusted) on a constant

currency basis.

The strong performance by Enterprise group was primarily

due to its sales from the Networking sub segment that saw

a whopping 54 percent year on year increase. The increase

was partially offset by Servers, Storage and Technology

Services sub-segment showing a drop of 1%, 3% and 9%

Y/Y respectively.

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Enterprise services did not show any change in revenue (-

6% Y/Y unadjusted) on a constant currency basis. The

Infrastructure Technology Outsourcing and Application

and Business Services sub-segment saw a drop of 8% and

3% Y/Y respectively.

The software segment showed a negative growth of 6

percent on a constant currency basis (-10% Y/Y

unadjusted).

Below chart summarizes the above facts.

Source: HPE Press Release

The investors saw the quarterly results cues positively and

were cheery about HPE’s outlook and its stated

commitment to return cash to shareholders. The shares

rallied 15% on Friday, 4th March. The earnings also signaled

a third consecutive quarter of top line growth on a

constant currency basis. The press release also spoke of its

commitment of returning 100% of FCF to shareholders.

Q1 Dividend Declaration

Post the spin-off on Nov 2015, HPE has announced its first cash dividend of 5.5 cents per share per quarter. The dividends were payable as of Jan 6 2016. The payment of dividends sent a positive signal to investors and the stock rose around 5.5% on Jan 6, until the market corrected.

We view this modest dividend declaration as a strong indicator by the CEO Whitman to investors, and this signals a stability post its independence as a company from the parent.

We expect the company to maintain the current payout ratio of 12.99% moving forward and expect a yearly

dividend of $0.22, $.24, $.26 in 2016, 2017 and 2018 respectively.

Acquisitions

Aruba Networks

In May 2015, HPE completed the acquisition of Aruba for $3B in a cash and debt deal. This translates to a value of $24.67 per share. Aruba is a leader in providing next generation access solutions for Mobile Enterprise. It provides mobile networks to hospitals, malls, universities and corporations. Aruba Networks has been imbibed into the Networking segment of HPE.

In connection with this acquisition, the Company recorded approximately $1.8 billion of goodwill, $643 million of intangible assets and $153 million of in-process research and development. (1)

Aruba generated revenues of $729 million in 2014. The company reported a compounded annual growth rate of 30 percent for the five years prior to the acquisition. (25)

We expect the acquisition of Aruba to propel HPE to a position of market leader (as seen in the Statista forecast) and is likely to give a tough competition to CISCO in the Wireless LAN space, who are the leaders in this segment. As can be seen in below chart the HP/Aruba combined revenue stood at a close second position behind CISCO, who are the market leaders. Further, we expect this gap between CISCO and HPE to narrow down in the foreseeable future.

Source: Statista

Segment Q1 Net Revenue

Growth Y/Y %

CC Growth Y/Y %

Non-GAAP Op $

Enterprise Group $7051M 1.00% 7.00% $944M

Enterprise Services $4688M -6.00% 0.00% $238M

Software $780M -10.00% -6.00% $136M

Financial Services $776M -3.00% 3.00% $100M

Total HPE $12.72B -3% 4% $1029M

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We estimate Aruba to grow by 30% with the overall Networking segment growing at 10.63% in 2016 . Further HPE’s decision to retain the core Aruba management team, which has till date been successful in steering the company, is a positive. Aruba will seek to realize the synergetic benefits of fatter cash balance of HPE and its successful presence across various geographies.

Let us understand the rationale behind the acquisition and the synergetic benefits that can be realized through the acquisition. HPE is like to benefit from the below factors:

Niche Wireless Technology: HPE will have access to some of the best wireless technology and products in the industry. Aruba has a strong presence in the 802.11 ac wireless technology category and thus is able to set up Wi-Fi networks in organizations with ease.

Air-Heads Community: Aruba has an active community comprising thousands of engineers, customers and partners involved in online discussions. The community has a strong brand loyalty and meets yearly through an event titled Atmosphere. Through a system of discussions, requests and feedback, Aruba is able to improvise on its products and features.

High Top Line Growth: Prior to the acquisition, the company has been able to achieve a Compounded Annual Growth Rate of around 30% Year on year. The revenues stood at $729 million in 2014. We expect the increasing trend to continue in the foreseeable future.

Aruba is likely to benefit from the following factors:

Global Presence: The strong geographical presence of HPE can provide Aruba with access to new markets and points of sales, adding to the revenue growth of Aruba. We have incorporated this aspect into our growth forecasts.

Capital: Further Aruba can benefit from the increased liquidity of HPE as the company can provide the necessary cash in order to expand into newer avenues of business and for Research and Development of new products. HPE had cash and cash equivalents totaling to $9.8B in 2015 and we forecast an increasing trend in the cash reserves in the foreseeable future.

Relationships: HPE currently has relations with more than half of the Fortune 1000 companies. Aruba is likely to benefit from these relationships as this will give them access to an additional channel of potential customers.

Trilead

For an undisclosed sum of money, HPE acquired Trilead, a Switzerland based firm focused on backup and recovery of virtual machines, in 2016.

We believe this investment is in line with HPE’s strategy of building on their core competency. However due to the undisclosed sum involved in this deal, we believe this is a very small addition to HPE and is unlikely to make a significant impact to the top line.

Partnership with Tsinghua Holdings

In May 2015 HP, the parent company of HPE sold 51% of stake in its Chinese networking business to Tsinghua Holdings.

The deal will result in a new business called H3C. Under the terms of the agreement, Tsinghua's subsidiary, Unisplendour Corp., will purchase a 51 percent stake in the new company for roughly $2.3 billion.H3C will become a subsidiary of Unisplendour of Tsinghua, which acts as the asset management arm of the Tsinghua University in China. (16)

HPE hopes to capitalize on the colossal Chinese market through this partnership and hopes to use this platform to reduce Chinese skepticism for fully owned foreign companies. Through the partnership and by giving a majority stake to Chinese investors, HPE hopes to lead in networking solutions, while being market leaders in servers, storage and technology services. Further, the deal is expected to enhance the R&D activities of HPE and add to its portfolio of offerings. The deal is yet to close. The deal was recently approved by China Security Regulatory Commission (CSRC) and is likely to be completed by May 2016 after completing final administrative processes and regulatory approvals.

We expect this deal to provide significant liquidity to HPE’s China operations and help it expand its footprint in the massive Chinese market. We expect the deal to contribute significantly to the top line growth when the deal is finalized.

Selling of Tipping Point Business

In October 2015, the Company signed a definitive agreement with Trend Micro International to sell the Tipping Point business for approximately $300 million.

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Tipping Point is a provider of next-generation intrusion prevention systems and related network security solutions. The revenues generated from the Tipping Point business are included in the Software segment. 1

This sell-off is in line with HPE’s philosophy of restructuring and a business focused on its core competencies. The deal however is meager in size to impact the top line. We expect the growth forecast for the Software segment to be unaffected by this decision.

INDUSTRY TRENDS

Hybrid Cloud

HPE competes in various segments. One of the segment they compete is in the Hybrid Cloud. Hybrid cloud refers to the use of private cloud and third party public cloud services. The rationale behind choosing a combination of the two is that enterprises are often skeptical to trust their critical data to public storage services. So they opt for a mix that allows them to host their critical data on private cloud, while less critical data can be hosted on public cloud platform, thus effectively lowering the storage costs of the enterprise.

Increasingly, organizations, especially startups and small caps are moving towards hybrid cloud in order to lower their initial capital expenditures.

Hyper Converged Infrastructure

Hyper-convergence is an infrastructure system that utilizes software-centric architecture that tightly integrates compute, storage, networking, virtualization resources and other technologies into a single product by a single vendor. (18)

Enterprises are increasingly seeking storage, server and networking solutions that require lesser space, have faster speeds and have better computational power. Hyper-converged infrastructure fits into this scheme of things and delivers data center solutions in a single entity. The compact size, scalability, faster deployment times, improved operational efficiency, and reduction in costs of such solutions make it an attractive proposition for enterprises. The adoption of these products are in their infancy but are expected to rise in coming months.

Hyper-converged infrastructure is an alternative to public cloud services. Here we see another rationale for HPE’s

choice to pursue such solutions and exiting Public Cloud Services. As we see in the chart (this was slightly prior to the split), the major players in this space are EMC, Cisco, HPE and Net App.

Market Leadership Chart

Source: Gartner

MARKETS AND COMPETITION

Peer Comparisons

HPE competes in different segments with major players in the industry. Let us dissect the market and competition from a segment viewpoint. Here we will discuss Enterprise Group and Enterprise Services segment only, as the other segments have competitors that overlap with the previous two and are smaller contributors to the top line.

HPE’s main competitors in the Enterprise Group segment are IBM, EMC, and Dell in the storage and servers niche, while Cisco is the main competitor in the networking space. We believe HPE has a head start over Dell due to the uncertainty surrounding the conclusion of Dell acquisition of EMC. Further the leaner model of HPE along with a focus on total enterprise solutions is an attractive incentive to incumbent clients of Dell who are hesitant to further their relationship with them. In the long run, however, we see trends of industry consolidation that may

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put a significant downward pressure on HPE product pricing. IBM is a colossal player in this segment and, like HPE, provides total enterprise solutions. The bigger brand recognition of IBM has made it a top solution provider to a more exhaustive client base than those that HPE cater to. Further, IBM has made significant acquisitions in the public cloud space, an area that HPE has recently exited from. However, by partnering with major public cloud service providers such as Microsoft, HPE have been able to compete with IBM majorly by narrowing their profitability margins. HPE is less debt financed as compared to IBM, which decreases the cost of capital and hence risk. HPE has a lower debt/equity ratio as compared to industry averages, thus is less leveraged and less risker as compared to its peers. IBM is heavily debt financed as can be seen in below chart.

Leverage Ratios

Company D/E Debt to Capital

HPE 47.10 32.02

EMC Corp 32.04 24.27

Western Digital 27.84 21.78

Seagate 137.67 57.93

NetApp 36.20 26.31

IBM 279.70 73.66

Cisco 42.47 29.81

VMWare 18.94 15.93

Average 77.75 35.21

CSC 91.37 47.75

Wipro 19.34 16.21

Average 52.60 31.99

Source: FactSet

In the networking space the recent acquisition of Aruba has propelled HPE to the closest rival of Cisco, who is the leader in the industry. HPE has sought to benefit from the goodwill and brand recognition of Aruba, while Aruba will benefit from the geographical presence and liquidity of HPE.

In the Enterprise services segment the primary competitors of HPE are Computer Science Corporation and Indian multinationals such as Infosys, and Wipro. HPE has EPS in line with the industry average in this segment and the companies here compete solely on price and quality.

Company

Market Cap(B)

Annual Revenue(M) P/E

HPE 23.56 51831 10.99

EMC Corp 51 24750 25.43

Western Digital 11.33 14572 13.09

Seagate 10.3 13739 9.15

NetApp 7.62 6108 20.64

IBM 133.68 81741 10.16

Cisco 135.21 49161 16.23

VMWare 20.86 6647 24.18

Average 49.20 31068.63 16.23

CSC 4.2 12173 11.66

Wipro 19.74 7663 23.15

Infosys 40 8702 19.86

Average 21.88 20092.25 16.41

Source: FactSet

HPE trades for lower Price to Earnings ratio as compared to its peers in the Enterprise Group and Enterprise Services segment. We see the stock as being undervalued and hence we recommend a BUY.

HPE has modest liquidity ratios that are slightly trailing below industry averages. Especially the cash ratio is significantly lower than industry average. A plausible explanation for this might be that the spin-off and the restructuring might have necessitated the usage of funds for setting up one-time events such as new accounting or HR departments.

Liquidity Ratios

Company

Current Ratio

Quick Ratio

Cash Ratio

HPE 1.41 1.31 0.44

EMC Corp 1.17 1.07 0.72

Western Digital 2.63 2.21 1.63

Seagate 2.38 1.95 1.06

NetApp 2.50 2.45 1.97

IBM 1.24 1.20 0.24

Cisco 3.23 3.16 2.56

VMWare 2.27 2.27 1.82

Average 2.10 1.95 1.31

CSC 1.36 1.36 0.58

Wipro 2.66 2.62 1.56

Infosys 3.05 3.05 2.09

Average 2.12 2.09 1.17

Source: Fact Set

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The Profitability Ratios indicate that HPE have some of the lowest ratios in the industry. The rationale behind the low gross margin and net margin is that the pricing pressure of the bigger players in the industry has forced HPE to compete on costs and thus trim their margins. The lower return on equity is due to the slim margins and also due to the restructuring charges that has lowered the net income. The downside of HPE is its inability to extract value from every dollar of its asset, thus having lower ROA then its peers.

Source: FactSet

Source: FactSet

The lower margins have resulted in HPE being traded at relatively lower multiples as compared to its peers. While analyzing the EV/EBIDTA multiple we notice that HPE trades at significantly lower multiple as compared to industry averages. We expect the EV/EBIDTA multiples to increase in future and achieve industry averages by 2020.

Source: FactSet

Source: FactSet

ECONOMIC OUTLOOK

Economic drivers for HPE are GDP growth (US, China, UK and Global), fed funds rate, and strength of US dollar.

Interest Rates

December 15th witnessed the first rate hike by Federal Reserve in nearly a decade. While the Fed has left the door open for further rates hikes, the low inflation levels are bound to impede further rate hikes, as the Fed aims for an inflation level of 2%. Further policy measures such as quantitative easing have been undertaken by the European Central Bank as they aim to boost growth in Europe. Following the trail of certain Central Banks in Europe, the Bank of Japan recently adopted negative interest rate in a move to spur growth and ingest liquidity in the aging Japanese economy.

We forecast the fed funds rate to remain at 0.55% over the 6 months horizon, while we estimate it to reach 1.17%

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Profitabilty Ratios-EG

ROE ROA Gross Margin Net Margin

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35

HPE CSC Wipro Infosys Average

Profitability Ratios-ES Segment

ROE ROA Gross Margin Net Margin

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EV/EBIDTA Multiple- EG Segment

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EV/EBIDTA Multiple-ES Segment

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over the next two years. The interest rate hikes are bound to increase the borrowing costs and thus affect HPE as businesses around US will find themselves with lesser liquidity to invest in enterprise infrastructure. However, we see this as a systematic risk affecting all the players in the industry.

Strengthening Dollar

A slowdown in China coupled with the recent rate hikes, makes the dollar an attractive currency as investors around the world look upon the dollar as a safe haven. Also the weakness in European markets and the migrant crisis has further exacerbated the flight to the dollar, which is increasingly perceived as a stable currency.

A stronger dollar is likely to put downward pressure on US exports. HPE is strongly dependent on revenue contributions from overseas operations, is highly prone to currency fluctuations and continuing strength in US dollar is likely to affect the top and bottom line revenues of enterprise firms. HPE uses forward contracts, interest rate and total return swaps to hedge against currency fluctuations. Over the next 6 months the EUR/USD is expected to be $1.05. Our 2-year long-term outlook sees the Euro weakening against the dollar to $1.04.

GDP growth

With real GDP growth for 3Q2015 at 2% coupled with a 1% estimated growth rate in 4Q2015, the Henry Fund research teams’ short-term forecast (6 month) for US Real GDP growth is 2.08%. Our long-term forecast (2 year) expects growth to increase to 2.72% by 2018. Our long term outlook of US economy is modest and we expect the US economy to be resilient to further interest rate hikes. We expect the negative top line growth for HPE in 2016 and the growth to pick up thereafter.

Below chart indicate the quarter to quarter Real GDP growth for US. We are seeing a trend in 2014 and 2015 where in Quarter2 draws in the highest growth and the growth slowing there on. We base our estimates as discussed above on these trends.

Source: Bureau of Economic Analysis (34)

Global IT spending

The world-wide IT spending is predicted to rise to $3.54 trillion dollars in 2016, from a 2015 spending level of $3.52, by a modest 0.6% in 2016. (35)

Source: Gartner

Our revenue growth percentage of -0.66% is slightly below the IT spending growth rate. The rationale for this is that we expect certain segment segments such as Enterprise Group to outperform the market as they cater to the core competency products of HPE, while we expect certain segments such as Enterprise services to underperform the market.

CATALYSTS FOR GROWTH

• The ability to differentiate and build a market share for HPE is heavily dependent on its ability to produce superior technology and products. This is directly dependent on its investment in Research and Development, which currently averages around $2.2B per year.

• Industry consolidation of the bigger players may put a downward pressure on cash flows and profits margins. We

Worldwide IT Spending Forecast (Billions of U.S. Dollars)

2015 Spendin

g

2015 Growth (%)

2016 Spendi

ng

2016 Growth (%)

Data Center Systems 170

1.8 175 3

Software 310 -1.4 326 5.3

Devices 653 -5.8 641 -1.9

IT Services 912 -4.5 940 3.1

Communications Services 1,472 -8.3

1,454 -1.2

Overall IT 3,517 -5.8 3,536 0.6

Page 12

are already seeing this happening with Dell acquisition of EMC, and Western Digital acquisition of SanDisk.

INVESTMENT POSITIVES

• The board has announced a $ 3 billion share repurchase in Oct 2015 without a particular expiration date. Share repurchases are usually announced when the management believes that the shares are undervalued, which may be the case with HPE currently.

• A clarity in business model and a focus on end-to-end enterprise solutions makes it an attractive proposition for enterprises seeking to reduce capital expenditure costs.

• A change in strategy from rivalry to partnership with Microsoft Azure, a public cloud service provider, has the potential to contribute to the top line.

• Closure of HPE Helion, HPE’s product in the public cloud space, was a significant decision by the management as the product was not able to compete with Amazon and Microsoft web services and was a loss leader.

• A strong culture of innovation backed up by a significant investment in R&D to the tune of $2.3 in fiscal 2015, $2.2 in 2014, and $2.0 in 2013

• A diversified supplier base with the exception of Intel and AMD.

• Revenue Stabilization in recent quarters. Three consistent quarters of top line growth on a constant currency basis.

INVESTMENT NEGATIVES

• Currency pressure will remain a major headwind as 61% of revenues come from outside US and hence HPE is susceptible to foreign currency fluctuations.

• Enterprises often prefer multiple vendors for different segments of business as opposed to opting for end to end solutions from a single vendor. This is done to diversify and reduce risk. This may reduce business for HPE, going forward

• Industry consolidation by competitors may put a downward pressure on HPE’s cash flows and may affect margins. HPE will thus be coerced to compete on price by reducing margins.

• HPE is likely to suffer from the effects of dis-synergies resulting from the spin-off. This is likely to add to costs such as new accounting, finance, human resources teams and restructuring costs.

VALUATION

The valuation of Hewlett Packard Enterprise was carried

out using DCF, DDM and Relative P/E valuation techniques.

The three approaches presented a price of $21.52, $15.39

and $22.37 respectively. We believe the stock value is

most closely captured by the DCF valuation as it most

closely captures the revenue decomposition and growth

forecasts of the different segments of business. The stock

currently trades for around $15.68 and thus we estimate

an upside of 37% that can be captured in the long run. We

believe this is a value stock and hence we have given a BUY

rating to the stock.

Post the spin-off of HPE from its parent HP Inc. on 1 Nov

2015, HPE presented its first dividend of 5.5 cents per

dollar of share in the first quarter of 2016. In the absence

of historical dividend payments, we have assumed the

2016 payout ratio to continue in the foreseeable future

and have assumed a payout ratio of 12.99%. We retrieve

the value of 12.99% as a ratio of the yearly dividend per

share of 0.22 divided by the forecasted 2016 Earnings per

Share of 1.69. While the DDM seems a good

approximation to the value of the stock, basing the thesis

on a single data point is not the most rationale choice.

Further the data does not capture the management’s

capability or the commitment to pay dividend in the

future. Hence we chose to put less emphasis on the DDM

model.

In carrying out Relative P/E valuation we chose

competitors of HPE in different segments and assigned a

weightage according to the percentage contributed to

revenue. We noted that the biggest revenue segments

were Enterprise Group and Enterprise Services, and the

two catered to a different set of competitors. We chose to

include the weightage of the other segments in the above

two due to the relatively small contribution of 6% and 7%

to the total revenue and because the other segments have

an overlapping peer base as the above two. For the

Page 13

Enterprise Group we chose EMC, Western Digital, Seagate,

NetApp, and IBM in the storage and server space while we

chose CISCO and VMWare in the networking space. We

also included Hewlett Packard Inc., which is a sister

company of HPE and hence closely resembles its business

model. For the Enterprise Services we chose Computer

Science Corporation, Wipro, and Infosys. While this is a

better approximation than the DDM model, we chose to

put less emphasis on this model because we feel the P/E

assumes an efficient market, which may not be the case

and the prices may be skewed for an entire industry.

Below charts summarizes the peer comparisons:

Enterprise Group, Weight 0.7

Ticker Company P/E 16

EMC EMC Corp 14.2

WDC Western Digital 8.3

STX Seagate Technology 12.5

NTAP NetApp 12.1

IBM IBM 10.3

HPQ Hewlett Packard Inc. 7.1

CSCO Cisco 11.7

VMW VMware 12.2

Source: FactSet

Enterprise Services, Weight 0.3

Ticker Company P/E 16

CSC Computer Science Corporation 12.4

WIT Wipro 21.7

INFY Infosys 20.6

Source: FactSet

The DCF model was based on the revenue decomposition

of different areas of business. Under the gamut of

Enterprise Group segment, we have assumed an industry

growth rate for the Industry Standard Servers sub-

segment of 2.71%, 2.56% and 1.26% in 2016, 2017 and

2018 respectively. We estimate Networking sub-segment

to grow at 10.63%, 10.87% and 11.25% in 2016, 2017 and

2018 respectively. The strong growth in Networking is

primarily due to the acquisition of Aruba. We estimate

Aruba product sales to grow at a Compounded Annual

Growth Rate of 30%. The rationale behind this choice of

assumption is that Aruba has grown at 25-30% CAGR for

the five years prior to being acquired by HPE. We give a

weightage of around 27% to Aruba Sales and the rest 63%

to other networking products for which we have assumed

industry growth rates of 3.19%, 3.53% and 4.05% in 2016,

2017 and 2018 respectively. This presents us with growth

values for Networking as discussed above. Further, the

Storage sub-segment is expected to grow at 3.19% in 2016

and the growth to pick up thereafter. The rationale behind

this choice is that the products under these categories are

technically superior and encompass the core

competencies of HPE and are thus expected to match the

industry growth rates. In the wake of its choice to quit its

operations in public cloud and partner with Microsoft, we

expect this division to do well in the hybrid cloud market.

Further the acquisition of Aruba will spur growth in the

networking space. Also we have assumed the Business

Critical Systems and Technology Services sub segment to

growth at the inflationary rates of 0.7%, the reason being

that historically these sub segments have not contributed

significantly to top line, but are expected to perform

modestly due to the restructuring.

We have modeled the Infrastructure Technology

Outsourcing sub-segment of Enterprise Services segment

to reflect negative historical growth rates. We expect the

negative trend to continue into the foreseeable future and

have projected growth rates of -11.16%,-8.56% and -5.96%

in 2016, 2017 and 2018 respectively. We expect the

growth to be positive post 2020. There has been no key

differentiating product in this segment or a strategic

decision by the management in this area and hence we

expect shrinking revenue growth to carry into 2016. We

expect the Application and Business services sub-segment

to match IT services Industry growth rate of 3.49%, 3.34%

and 3.39% in 2016, 2017 and 2018 respectively, owing to

the good reputation of HPE in this genre.

Similarly we have assumed industry growth rates for the

Software segment and expect it to grow by 3.49%, 3.34%

and 3.39% in 2016, 2017 and 2018 respectively.

We expect the negative trend in Financial Services

segment to continue partially offset by the GDP growth

Page 14

rate of 2.6% of the economy. Hence we assume a growth

rate of -5.46%, -2.86% and -0.26% in 2016, 2017 and 2018

respectively.

Assumptions

Beta: We have used Fama-French three factor model analysis to obtain the Beta of the company. The retrieved Beta of 1.65 is indicative of the high risk premium the market has associated with a newly spun off company and the value captures the limited amount of data set available since Oct 2015.

CV growth of NOPLAT: We have used a conservative CV growth rate matching the inflation rate. The rationale behind this is that we expect future fed fund rate hikes to cause a slow growth of the economy and thus we assume a modest growth.

Risk Premium: We believe that a 5% risk premium

adequately captures the risk associated with the market

over and above the risk free rate.

We assume that COGS as a percentage of Sales for 2015 to continue in the foreseeable future. Thus we assume values of 24.91% and 45.96% for cost of products and cost of services respectively that reflect the 2015 COGS to Sales ratio. The reason for choice of 2015 values is because 2015 provides the most approximate trend post the spin-off. Also, we are using historic R&D and SG&A as a percentage of sales to forecast future values. The values chosen here are 3.84% and 15.11% respectively that reflect the 2015 ratios. The reason for this is that we are noticing relatively consistent trends in such expenses. Due to the spin-off certain costs such as accounting, Human Resources, finance costs are likely to increase. However this is captured in SG&A as a percentage of Sales.

Further, we are assuming a straight line depreciation for amortization of intangible assets. Certain costs such as separation costs, defined benefit plan settlement charges and impairment of data center asset are one-time costs, related to the spin-off, and hence are not likely to carry forward.

The gross PPE forecast is grown at a percentage value of 7.88% reflecting the CAGR for the year 2013 to 2015, as we expect the historical trends to continue.

Assumption of a consensus estimate of 5% for risk premium coupled with a high Beta has added to the cost of equity, in turn increasing the WACC estimate.

We are seeing a high deviation of cost of equity from Return of equity in steady state, which reaffirms our belief that this is a value stock and not a growth stock. This deviation is probably due to the effects of dis synergies and also due to the higher uncertainty that is prevalent in market with the spin-off that has caused a higher valuation of beta.

KEYS TO MONITOR

Our model is highly susceptible to growth estimates for HPE. It is quite reasonable that we change our recommendation if HPE is unable to achieve the top line growth that has been set.

Another factor to be monitored is the beta. Owing to the limited amount of data as applicable to the months Oct-Mar, we have computed a beta that has captured the high amount of risk associated with the spin-off. However, we expect over time for the beta to slowly reduce and move towards industry average. This factor should be constantly updated on a periodic basis and plugged in to the model to obtain a better forecast.

Further the fed funds rate is a key ratio that needs to be monitored. In the event of a rate hike, the reaction of the market to enterprise spending needs to be monitored.

HPE has placed a significant emphasis on Research and Development and have historically averaged around $2.2 B. While there has been no public disclosures of any new products, it is quite reasonable to expect innovative products in the near future. Any such public announcements needs to be monitored and the market relevance of these products needs to be assessed.

Apart from the domestic market, HPE caters to large markets in UK and China. The strength of the US dollar in relation to the Yuan and Pound also needs to be monitored, along with macro-economic factors affecting these countries.

Page 15

REFERENCES

1. Hewlett Packard Enterprise Inc. 10K 2. CRN-Magazine

http://www.crn.com/news/cloud/300078558/hps-helion-public-cloud-bursts-set-to-shut-down-jan-31.htm/pgno/0/1

3. Aruba Networks Website http://www.arubanetworks.com/aruba-networks-hp-to-join-forces/

4. Statista http://www.statista.com.proxy.lib.uiowa.edu/statistics/483062/global-it-services-growth-forecast/

5. Business Insider Magazine http://www.businessinsider.com/hp-shutting-down-hp-helion-public-cloud-2015-10

6. CRN Magazine http://www.crn.com/slide-shows/virtualization/300079205/top-10-hewlett-packard-enterprise-stories-of-the-year.htm/pgno/0/10

7. VM Blog http://vmblog.com/archive/2016/02/15/hewlett-packard-enterprise-hpe-acquires-vm-backup-software-provider-trilead.aspx#.VtPjovkrLIU

8. http://www.businessinsider.com/meg-whitman-hpe-will-sell-microsofts-cloud-2015-11

9. FactSet 10. Thomson One 11. https://support.rackspace.com/white-paper/hybrid-

cloud-the-evolved-enterprise-cloud-of-the-future/ 12. Gartner

http://www.gartner.com/newsroom/id/2599315 13. Portfolio Visualizer

https://www.portfoliovisualizer.com/factor-analysis#analysisResults

14. Fortune Magazine

http://fortune.com/2016/03/03/hewlett-packard-

enterprise-revenue-slowdown/?xid=yahoo_fortune

15. Seeking Alpha http://seekingalpha.com/article/3954136-hewlett-packard-enterprise-hpe-margaret-c-whitman-q1-2016-results-earnings-call-transcript

16. ZD Net http://www.zdnet.com/article/hp-tsinghua-partner-in-joint-chinese-enterprise-tech-venture/

17. PC World http://www.pcworld.com/article/2925612/hp-sells-majority-stake-of-china-server-storage-business-to-tsinghua-holdings.html

18. http://searchvirtualstorage.techtarget.com/definition/hyper-convergence

19. Bureau of Economic Analysis http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

20. Mergent 21. Yahoo Finance 22. Google Finance 23. Hewlett Packard Enterprise Investor Relations 24. Aswath Damodaran Data 25. HPE Newsroom

http://h30261.www3.hp.com/news-and-events/news-library/2015/02-03-2015.aspx

26. Bloomberg http://www.bloomberg.com/news/articles/2015-03-02/hewlett-packard-agrees-to-buy-aruba-networks-for-2-7-billion

27. Yahoo Finance http://finance.yahoo.com/news/why-did-hp-acquire-aruba-180512649.html

28. Wall Street Journal http://www.wsj.com/articles/hewlett-packard-to-buy-aruba-networks-1425303619

29. CRN http://www.crn.com/slide-shows/networking/300075989/the-big-picture-5-viewpoints-on-hps-acquisition-of-aruba-networks.htm/pgno/0/5

30. http://www.securedgenetworks.com/blog/what-the-hp-acquisition-of-aruba-networks-means-to-customers

31. Trilead https://www.trilead.com/

32. HPE Newsroom http://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/fy16-q1-hpe-earnings-presentation.pdf

33. Bloomberg http://www.bloomberg.com/news/articles/2015-05-21/hp-says-tsinghua-holdings-to-buy-control-of-chinese-asset

34. Bureau of Economic Analysis http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm

35. Gartner http://www.gartner.com/newsroom/id/3186517

Page 16

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Hewlett Packard Enterprise Company

Revenue Decomposition

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total net revenue 57371.00 55123.00 52107.00 51761.68 51974.82 52518.11 53510.56 54842.79

% Change Y-Y -6.01% -3.92% -5.47% ‐0.66% 0.41% 1.05% 1.89% 2.49%

Enterprise Group

Industry Standard Servers 12100.00 12472.00 13412.00 13775.47 14128.12 14306.13 14650.91 15004.00

% Change Y-Y 3.07% 7.54% 2.71% 2.56% 1.26% 2.41% 2.41%

Networking 2525.00 2628.00 2846.00 3148.45 3490.77 3883.42 4264.13 4682.15

% Change Y-Y 4.08% 8.30% 10.63% 10.87% 11.25% 9.80% 9.80%

Storage 3474.00 3315.00 3180.00 3281.44 3397.28 3534.87 3607.33 3681.28

% Change Y-Y ‐4.58% ‐4.07% 3.19% 3.53% 4.05% 2.05% 2.05%

Business Critical Systems 1190.00 929.00 807.00 812.65 818.34 824.07 829.83 835.64

% Change Y-Y ‐21.93% ‐13.13% 0.70% 0.70% 0.70% 0.70% 0.70%

Technology Services 8700.00 8383.00 7662.00 7715.63 7769.64 7824.03 7878.80 7933.95

‐3.64% ‐8.60% 0.70% 0.70% 0.70% 0.70% 0.70%

Enterprise Group Total Revenue 27989.00 27727.00 27907.00 28733.64 29604.14 30372.52 31231.00 32137.02

% Change Y-Y ‐0.94% 0.65% 2.96% 3.03% 2.60% 2.83% 2.90%

% of Total Revenue 48.79% 50.30% 53.56% 55.51% 56.96% 57.83% 58.36% 58.60%

Enterprise Services

Infrastrucuture technology Outsourcing 15221.00 14038.00 12107.00 10756.40 9836.13 9250.34 8939.94 8872.40

% Change Y-Y ‐7.77% ‐13.76% ‐11.16% ‐8.56% ‐5.96% ‐3.36% ‐0.76%

Application and Business Services 8859.00 8360.00 7699.00 7967.70 8233.82 8512.94 8797.27 9061.19

% Change Y-Y ‐5.63% ‐7.91% 3.49% 3.34% 3.39% 3.34% 3%

Enterprise Services Total Revenue 24080.00 22398.00 19806.00 18724.10 18069.95 17763.28 17737.22 17933.59

% Change Y-Y ‐6.99% ‐11.57% ‐5.46% ‐3.49% ‐1.70% ‐0.15% 1.11%

% of Total Revenue 41.97% 40.63% 38.01% 36.17% 34.77% 33.82% 33.15% 32.70%

Software 4035.00 3933.00 3622.00 3748.41 3873.60 4004.92 4138.68 4262.84

% Change Y-Y ‐2.53% ‐7.91% 3.49% 3.34% 3.39% 3.34% 3%

% of Total Revenue 7.03% 7.13% 6.95% 7.24% 7.45% 7.63% 7.73% 7.77%

Financial Services 3629.00 3498.00 3216.00 3040.35 2953.34 2945.61 3014.49 3163.35

% Change Y-Y ‐3.61% ‐8.06% ‐5.46% ‐2.86% ‐0.26% 2.34% 4.94%

% of Total Revenue 6.33% 6.35% 6.17% 5.87% 5.68% 5.61% 5.63% 5.77%

Corporate Investments 8.00 4.00 7.00 7.88 8.86 9.97 11.21 12.61

% Change Y-Y ‐50.00% 75.00% 12.50% 12.50% 12.50% 12.50% 12.50%

% of Total Revenue 0.01% 0.01% 0.01% 0.02% 0.02% 0.02% 0.02% 0.02%

Intersegment Net Revenue and Other 2370.00 2437.00 2451.00 2492.69 2535.08 2578.19 2622.04 2666.64

% Change Y-Y 2.83% 0.57% 1.70% 1.70% 1.70% 1.70% 1.70%

% of Total Revenue 4.13% 4.42% 4.70% 4.82% 4.88% 4.91% 4.90% 4.86%

Hewlett Packard Enterprise Company

Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total net revenue 57371.00 55123.00 52107.00 51761.68 51974.82 52518.11 53510.56 54842.79

Costs and Expenses

Cost of products 12360.00 12394.00 12978.00 12891.99 12945.08 13080.39 13327.58 13659.39

Cost of services 28958.00 26815.00 23950.00 23791.28 23889.25 24138.96 24595.12 25207.45

Financing interest 312.00 277.00 240.00 262.20 263.28 266.04 271.06 277.81

Research & development 1956.00 2197.00 2338.00 1987.00 1995.18 2016.03 2054.13 2105.27

Selling, general & administrative 8601.00 8717.00 8025.00 7819.00 7851.19 7933.26 8083.18 8284.42

Amortization of intangible assets 1228.00 906.00 852.00 386.0 386.0 386.0 386.0 386.0

Impairment of goodwill & intangible assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Restructuring charges 983.00 1471.00 954.00 763.2 572.4 381.6 190.8 0.0

Acquisition-related charges 21.00 11.00 89.00 71.2 53.4 35.6 17.8 0.0

Separation costs 0.00 0.00 797.00 0.00 0.00 0.00 0.00 0.00

Defined benefit plan settlement charges 0.00 0.00 225.00 0.00 0.00 0.00 0.00 0.00

Impairment of data center assets 0.00 0.00 136.00 0.00 0.00 0.00 0.00 0.00

Total operating expenses 54419.00 52788.00 50584.00 47971.87 47955.78 48237.88 48925.67 49920.35

Operating Income(loss) 2952.00 2335.00 1523.00 3789.81 4019.04 4280.22 4584.89 4922.44

Interest & other, net -81.00 -91.00 -53.00 ‐70.39 ‐70.68 ‐71.42 ‐72.77 ‐74.58

Earnings (loss) before taxes 2871.00 2244.00 1470.00 3719.41 3948.35 4208.80 4512.12 4847.86

Provision for taxes 820.00 596.00 -991.00 795.95 844.95 900.68 965.59 1037.44

Net earnings (loss) 2051.00 1648.00 2461.00 2923.46 3103.41 3308.12 3546.52 3810.41

Weighted average shares outstanding-basic - - 1804.00 1725.89 1694.50 1666.69 1642.09 1620.39

Year end shares outstanding 1742.52 1742.52 1742.52 1709.26 1679.75 1653.62 1630.55 1610.23

Net earnings per share-basic 1.18 0.95 1.36 1.69 1.83 1.98 2.16 2.35

Dividends per share - - - 0.22 0.24 0.26 0.28 0.31

Payout Ratio - - - 12.99% 12.99% 12.99% 12.99% 12.99%

Hewlett Packard Enterprise Company

Balance Sheet

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Current Assets

Cash & cash equivalents 2182.00 2319.00 9842.00 16350.35 22079.83 26475.14 30254.54 33820.21

Accounts receivable, gross 9608.00 8549.00 8647.00 8428.66 8463.37 8551.84 8713.44 8930.38

Less: allowance for doubtful accounts 150.00 126.00 109.00 120.64 121.14 122.41 124.72 127.82

Accounts receivable, net 9458.00 8423.00 8538.00 8308.02 8342.23 8429.43 8588.72 8802.55

Financing receivables 3170.00 2974.00 2918.00 2850.46 2862.19 2892.11 2946.77 3020.13

Inventory 2078.00 1884.00 2198.00 1942.46 1950.46 1970.85 2008.09 2058.08

Deferred tax assets - short-term 2218.00 1522.00 1210.00 1544.10 1550.46 1566.67 1596.27 1636.02

Value-added taxes receivable 1213.00 1165.00 1538.00 1238.72 1243.82 1256.83 1280.58 1312.46

Supplier & other receivables 730.00 777.00 1992.00 1122.35 1126.97 1138.75 1160.27 1189.16

Prepaid & other current assets 3330.00 2967.00 2937.00 2902.68 2914.63 2945.10 3000.75 3075.46

Total other current assets 7491.00 6431.00 7677.00 6807.85 6835.88 6907.34 7037.87 7213.09

Total current assets 24379.00 22031.00 31173.00 36259.14 42070.60 46674.87 50835.99 54914.06

Property, plant & equipment, gross 17062.00 16960.00 21424.00 23113.06 23274.85 23437.77 23601.84 23767.05

Less: accumulated depreciation 8552.00 8440.00 11538.00 16234.93 19502.80 21294.94 22313.02 22925.35

Property, plant & equipment, net 8510.00 8520.00 9886.00 6878.12 3772.05 2142.84 1288.82 841.70

Long-term financing receivables & other assets 7004.00 6503.00 11020.00 7790.87 7822.96 7904.73 8054.11 8254.63

Goodwill 25945.00 25960.00 27261.00 27261.00 27261.00 27261.00 27261.00 27261.00

Intangible assets 2937.00 2057.00 1930.00 1544.00 1158.00 772.00 386.00 0.00

Total assets 68775.00 65071.00 81270.00 79733.14 82084.61 84755.44 87825.92 91271.39

Notes payable & short-term borrowings 1058.00 894.00 691.00 691.00 691.00 691.00 691.00 691.00

Accounts payable 4335.00 4889.00 5828.00 4763.80 4783.42 4833.42 4924.76 5047.37

Employee compensation & benefits 3087.00 2737.00 2902.00 2746.02 2757.32 2786.14 2838.80 2909.47

Taxes on earnings 711.00 706.00 634.00 634.00 634.00 634.00 634.00 634.00

Deferred revenue 5528.00 5129.00 5154.00 4974.53 4995.02 5047.23 5142.61 5270.64

Accrued restructuring 698.00 711.00 628.00 640.41 643.05 649.77 662.05 678.53

Total other accrued liabilities 5495.00 4694.00 6314.00 5212.55 5234.02 5288.73 5388.67 5522.83

Total current liabilities 20912.00 19760.00 22151.00 19662.32 19737.82 19930.29 20281.88 20753.84

Long-term debt 617.00 485.00 15103.00 15103.00 15103.00 15103.00 15103.00 15103.00

Pension liabilities 2602.00 2606.00 3432.00 3432.00 3432.00 3432.00 3432.00 3432.00

Deferred revenue - long-term 3183.00 3109.00 3565.00 3214.60 3227.83 3261.57 3323.21 3405.95

Deferred tax liability - long-term 1672.00 568.00 1238.00 462.40 490.86 523.24 560.95 602.68

Tax liability - long-term 450.00 408.00 778.00 778.00 778.00 778.00 778.00 778.00

Other long-term liabilities 964.00 963.00 1085.00 1085.00 1085.00 1085.00 1085.00 1085.00

Total other liabilities 8871.00 7654.00 10098.00 8971.99 9013.69 9079.81 9179.16 9303.63

Total non current liabilities 9488.00 8139.00 25201.00 24074.99 24116.69 24182.81 24282.16 24406.63

Total Liabilities 30400.00 27899.00 47352.00 43737.31 43854.52 44113.10 44564.04 45160.47

Parent company investment 39683.00 39024.00 38550.00 38080.41 37610.82 37141.23 36671.64 36202.05

Accumulated other comprehensive income (loss) -1695.00 -2248.00 -5015.00 ‐5015.00 ‐5015.00 ‐5015.00 ‐5015.00 ‐5015.00

Treasury Stock 0.00 0.00 0.00 600.00 600.00 600.00 600.00 600.00

Equity attributable to the Company 37988.00 36776.00 33535.00 33065.41 32595.82 32126.23 31656.64 31187.05

Retained Earnings 0.00 0.00 0.00 2547.42 5251.27 8133.10 11222.24 14540.87

Non-controlling interests 387.00 396.00 383.00 383.00 383.00 383.00 383.00 383.00

Total equity 38375.00 37172.00 33918.00 35995.83 38230.09 40642.33 43261.88 46110.92

Total Liabilities and Stockholders equity 68775.00 65071.00 81270.00 79733.14 82084.61 84755.44 87825.92 91271.39

Hewlett Packard Enterprise Company

Cash Flow Statement

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

Net Income 2923.46 3103.41 3308.12 3546.52 3810.41

Add: Depreciation Expense 4696.93 3267.86 1792.14 1018.08 612.33

Add:Amortization 386.00 386.00 386.00 386.00 386.00

Accounts receivable, net 229.98 ‐34.21 ‐87.20 ‐159.29 ‐213.83

Financing receivables 67.54 ‐11.74 ‐29.92 ‐54.65 ‐73.36

Inventory 255.54 ‐8.00 ‐20.39 ‐37.24 ‐49.99

Total other current assets 869.15 ‐28.03 ‐71.45 ‐130.53 ‐175.22

Long-term financing receivables & other assets 3229.13 ‐32.08 ‐81.77 ‐149.38 ‐200.52

Intangible assets 0.00 0.00 0.00 0.00 0.00

Accounts payable ‐1064.20 19.62 50.00 91.34 122.61

Employee compensation & benefits ‐155.98 11.31 28.82 52.65 70.68

Taxes on earnings 0.00 0.00 0.00 0.00 0.00

Deferred revenue ‐179.47 20.48 52.21 95.38 128.03

Accrued restructuring 12.41 2.64 6.72 12.28 16.48

Total other liabilities ‐1126.01 41.70 66.12 99.34 124.48

Total other accrued liabilities ‐1101.45 21.46 54.71 99.94 134.16

Net cash flows from operating activities 9043.04 6760.42 5454.11 4870.44 4692.26

Property, plant & equipment, gross ‐1689.06 ‐161.79 ‐162.92 ‐164.06 ‐165.21

Goodwill 0.00 0.00 0.00 0.00 0.00

Non-controlling interests 0.00 0.00 0.00 0.00 0.00

Net cash flows from investing activities ‐1689.06 ‐161.79 ‐162.92 ‐164.06 ‐165.21

Notes payable & short-term borrowings 0.00 0.00 0.00 0.00 0.00

Long-term debt 0.00 0.00 0.00 0.00 0.00

Change in Common Stock ‐469.59 ‐469.59 ‐469.59 ‐469.59 ‐469.59

Payment of Cash Dividend ‐376.04 ‐399.56 ‐426.29 ‐457.38 ‐491.79

Net cash flows from financing activities ‐845.63 ‐869.15 ‐895.88 ‐926.97 ‐961.38

Cash Flow from all activities: 6508.35 5729.48 4395.31 3779.40 3565.66

Net increase in cash & cash equivalents

Cash & cash equivalents, beginning of year 9842 16350 22080 26475 30255

Cash & cash equivalents, end of year 16,350.35                     22,079.83   26,475.14   30,254.54   33,820.21  

Hewlett Packard Enterprise Company

Cash Flow Statement

Fiscal Years Ending Dec. 31 2013 2014 2015

Net earnings (loss) 2051.00 1648.00 2461.00

Adjustments

Depreciation & amortization 4396.00 4144.00 3947.00

Impairment of goodwill & intangible assets - - -

Stock-based compensation expense 374.00 427.00 565.00

Provision for doubtful accounts 81.00 80.00 52.00

Provision for inventory 161.00 125.00 155.00

Restructuring charges 983.00 1471.00 954.00

Deferred taxes on earnings -248.00 -304.00 -2522.00

Excess tax benefit from stock-based compensation -1.00 -44.00 -100.00

Other adjustments, net 325.00 11.00 376.00

Accounts receivable 580.00 986.00 9.00

Financing receivables 478.00 428.00 -393.00

Inventory -251.00 69.00 -424.00

Accounts payable 472.00 611.00 868.00

Taxes on earnings 532.00 404.00 956.00

Restructuring -733.00 -1239.00 -1021.00

Other assets & liabilities -461.00 -1906.00 -2222.00

Net cash flows from operating activities 8739.00 6911.00 3661.00

Investment in property, plant and equipment -2497.00 -3620.00 -3344.00

Proceeds from sale of property, plant & equipment 370.00 606.00 380.00

Purchases of available-for-sale securities & other investments -938.00 -940.00 -243.00

Maturities & sales of available-for-sale securities & other investments 1005.00 1023.00 298.00

Payments made in connection with business acquisitions, net of cash acquired -167.00 -49.00 -2644.00

Proceeds from business divestiture, net - 6.00 140.00

Net cash flows from investing activities -2227.00 -2974.00 -5413.00

Short-term borrowings with original maturities less than 90 days, net -121.00 18.00 -39.00

Issuance of debt 1083.00 852.00 866.00

Payment of debt -2200.00 -1135.00 -1077.00

Net transfers to Parent -5196.00 -3542.00 9440.00

Issuance of Senior Notes relating to separation - - 14546.00

Distribution of net proceeds of senior notes relating to separation to Parent - - -14529.00

Cash dividends paid to non-controlling interests -31.00 -37.00 -32.00

Excess tax benefit from stock-based compensation 1.00 44.00 100.00

Net cash flows from financing activities -6464.00 -3800.00 9275.00

Cash Flow from all activities:

Net increase in cash & cash equivalents 48.00 137.00 7523.00

Cash & cash equivalents, beginning of year 2134.00 2182.00 2319.00

Cash & cash equivalents, end of year 2182.00 2319.00 9842.00

Hewlett Packard Enterprise Company

Common Size Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total net revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Costs and Expenses

Cost of products 21.54% 22.48% 24.91% 24.91% 24.91% 24.91% 24.91% 24.91%

Cost of services 50.47% 48.65% 45.96% 45.96% 45.96% 45.96% 45.96% 45.96%

Financing interest 0.54% 0.50% 0.46% 0.51% 0.51% 0.51% 0.51% 0.51%

Research & development 3.41% 3.99% 4.49% 3.84% 3.84% 3.84% 3.84% 3.84%

Selling, general & administrative 14.99% 15.81% 15.40% 15.11% 15.11% 15.11% 15.11% 15.11%

Amortization of intangible assets 2.14% 1.64% 1.64% 0.75% 0.74% 0.73% 0.72% 0.70%

Impairment of goodwill & intangible assets

Restructuring charges 1.71% 2.67% 1.83% 1.47% 1.10% 0.73% 0.36% 0.00%

Acquisition-related charges 0.04% 0.02% 0.17% 0.14% 0.10% 0.07% 0.03% 0.00%

Separation costs 1.53%

Defined benefit plan settlement charges 0.43%

Impairment of data center assets 0.26%

Total operating expenses 94.85% 95.76% 97.08% 92.68% 92.27% 91.85% 91.43% 91.02%

Operating Income(loss) 5.15% 4.24% 2.92% 7.32% 7.73% 8.15% 8.57% 8.98%

Interest & other, net ‐0.14% ‐0.17% ‐0.10% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14%

Earnings (loss) before taxes 5.00% 4.07% 2.82% 7.19% 7.60% 8.01% 8.43% 8.84%

Provision for taxes 1.43% 1.08% ‐1.90% 1.54% 1.63% 1.71% 1.80% 1.89%

Net earnings (loss) 3.57% 2.99% 4.72% 5.65% 5.97% 6.30% 6.63% 6.95%

Hewlett Packard Enterprise Company

Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Current Assets

Cash & cash equivalents 3.80% 4.21% 18.89% 31.59% 42.48% 50.41% 56.54% 61.67%

Accounts receivable, gross 16.75% 15.51% 16.59% 16.28% 16.28% 16.28% 16.28% 16.28%

Less: allowance for doubtful accounts 0.26% 0.23% 0.21% 0.23% 0.23% 0.23% 0.23% 0.23%

Accounts receivable, net 16.49% 15.28% 16.39% 16.05% 16.05% 16.05% 16.05% 16.05%

Financing receivables 5.53% 5.40% 5.60% 5.51% 5.51% 5.51% 5.51% 5.51%

Inventory 3.62% 3.42% 4.22% 3.75% 3.75% 3.75% 3.75% 3.75%

Deferred tax assets - short-term 3.87% 2.76% 2.32% 2.98% 2.98% 2.98% 2.98% 2.98%

Value-added taxes receivable 2.11% 2.11% 2.95% 2.39% 2.39% 2.39% 2.39% 2.39%

Supplier & other receivables 1.27% 1.41% 3.82% 2.17% 2.17% 2.17% 2.17% 2.17%

Prepaid & other current assets 5.80% 5.38% 5.64% 5.61% 5.61% 5.61% 5.61% 5.61%

Total other current assets 13.06% 11.67% 14.73% 13.15% 13.15% 13.15% 13.15% 13.15%

Total current assets 42.49% 39.97% 59.82% 70.05% 80.94% 88.87% 95.00% 100.13%

Property, plant & equipment, gross 29.74% 30.77% 41.12% 44.65% 44.78% 44.63% 44.11% 43.34%

Less: accumulated depreciation 49.47% 68.03% 31.36% 37.52% 40.55% 41.70% 41.80%

Property, plant & equipment, net ‐18.70% ‐26.92% 13.29% 7.26% 4.08% 2.41% 1.53%

Long-term financing receivables & other assets 12.21% 11.80% 21.15% 15.05% 15.05% 15.05% 15.05% 15.05%

Goodwill 45.22% 47.09% 52.32% 52.67% 52.45% 51.91% 50.95% 49.71%

Intangible assets 5.12% 3.73% 3.70% 2.98% 2.23% 1.47% 0.72% 0.00%

Total assets 119.88% 118.05% 155.97% 154.04% 157.93% 161.38% 164.13% 166.42%

Notes payable & short-term borrowings 1.84% 1.62% 1.33% 1.33% 1.33% 1.32% 1.29% 1.26%

Accounts payable 7.56% 8.87% 11.18% 9.20% 9.20% 9.20% 9.20% 9.20%

Employee compensation & benefits 5.38% 4.97% 5.57% 5.31% 5.31% 5.31% 5.31% 5.31%

Taxes on earnings 1.24% 1.28% 1.22% 1.22% 1.22% 1.21% 1.18% 1.16%

Deferred revenue 9.64% 9.30% 9.89% 9.61% 9.61% 9.61% 9.61% 9.61%

Accrued restructuring 1.22% 1.29% 1.21% 1.24% 1.24% 1.24% 1.24% 1.24%

Total other accrued liabilities 9.58% 8.52% 12.12% 10.07% 10.07% 10.07% 10.07% 10.07%

Total current liabilities 36.45% 35.85% 42.51% 37.99% 37.98% 37.95% 37.90% 37.84%

Long-term debt 1.08% 0.88% 28.98% 29.18% 29.06% 28.76% 28.22% 27.54%

Total other liabilities 15.46% 13.89% 19.38% 17.33% 17.34% 17.29% 17.15% 16.96%

Total non current liabilities 16.54% 14.77% 48.36% 46.51% 46.40% 46.05% 45.38% 44.50%

Total Liabilities 52.99% 50.61% 90.87% 84.50% 84.38% 84.00% 83.28% 82.35%

Parent company investment 69.17% 70.79% 73.98% 73.57% 72.36% 70.72% 68.53% 66.01%

Accumulated other comprehensive income (loss) ‐2.95% ‐4.08% ‐9.62% ‐9.69% ‐9.65% ‐9.55% ‐9.37% ‐9.14%

Treasury Stock 0.00% 0.00% 0.00% 1.16% 1.15% 1.14% 1.12% 1.09%

Equity attributable to the Company 66.21% 66.72% 64.36% 63.88% 62.71% 61.17% 59.16% 56.87%

Retained Earnings 0.00% 0.00% 0.00% 4.92% 10.10% 15.49% 20.97% 26.51%

Non-controlling interests 0.67% 0.72% 0.74% 0.74% 0.74% 0.73% 0.72% 0.70%

Total equity 66.89% 67.43% 65.09% 69.54% 73.56% 77.39% 80.85% 84.08%

Total Liabilities and Stockholders equity 119.88% 118.05% 155.97% 154.04% 157.93% 161.38% 164.13% 166.42%

Hewlett Packard Enterprise Company

Value Driver Estimation

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Marginal Tax Rate Calculation

Federal Statuatory rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%

State income taxes, net of federal tax benefit 2.00% 2.40% 14.10% 14.10% 14.10% 14.10% 14.10% 14.10%

Foreign rate differential  ‐19.90% ‐9.60% ‐53.60% ‐27.70% ‐27.70% ‐27.70% ‐27.70% ‐27.70%

Marginal Tax Rate  17.10% 27.80% ‐4.50% 21.40% 21.40% 21.40% 21.40% 21.40%

EBITA Calculation

Total Revenue 57371.00 55123.00 52107.00 51761.68 51974.82 52518.11 53510.56 54842.79

‐COGS ‐41318.00 ‐39209.00 ‐36928.00 ‐36683.27 ‐36834.32 ‐37219.35 ‐37922.70 ‐38866.84

‐SG&A ‐8601.00 ‐8717.00 ‐8025.00 ‐7819.00 ‐7851.19 ‐7933.26 ‐8083.18 ‐8284.42

‐Research and Development ‐1956.00 ‐2197.00 ‐2338.00 ‐1987.00 ‐1995.18 ‐2016.03 ‐2054.13 ‐2105.27

‐Amortization of Purchased Intangible Assets ‐1228.00 ‐906.00 ‐852.00 ‐386.00 ‐386.00 ‐386.00 ‐386.00 ‐386.00

+Implied Interest on Operating Leases 0.00 0.00 0.00 112.43 121.29 130.85 141.17 152.30

‐Financing Interest ‐312.00 ‐277.00 ‐240.00 ‐262.20 ‐263.28 ‐266.04 ‐271.06 ‐277.81

EBITA 3956.00 3817.00 3724.00 4736.63 4766.13 4828.28 4934.66 5074.74

Less Adjusted Income Taxes

Provision for income taxes 820.00 596.00 ‐991.00 795.95 844.95 900.68 965.59 1037.44

+Tax Shield on Interest expense 13.85 25.30 ‐2.39 15.06 15.13 15.28 15.57 15.96

+Tax Shield  on Restructuring Charges 168.09 408.94 ‐42.93 163.32 122.49 81.66 40.83 0.00

+Tax Shield on Acquisition related charges 3.59 3.06 ‐4.01 15.24 11.43 7.62 3.81 0.00

+Tax Shield on Op Lease interest 0.00 0.00 0.00 24.06 25.96 28.00 30.21 32.59

+Tax Shield on Impairment of Goodwill & intangible assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

+Tax Shield on Separation Costs 0.00 0.00 ‐35.87 0.00 0.00 0.00 0.00 0.00

+Tax Shield on Defined benefit plan settlement charges 0.00 0.00 ‐10.13 0.00 0.00 0.00 0.00 0.00

+Tax Shield on Impairment of data center assets 0.00 0.00 ‐6.12 0.00 0.00 0.00 0.00 0.00

‐Tax on Investment Gains 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Adjusted Taxes 1005.54 1033.29 ‐1092.43 1013.64 1019.95 1033.25 1056.02 1085.99

Plus Changes in Deferred Taxes

Change in Deferred Taxes ‐248.00 ‐304.00 ‐2522.00 ‐1109.71 22.10 16.17 8.10 2.00

NOPLAT: EBITA‐Adjusted Taxes+Change in DT

NOPLAT 2702.47 2479.71 2294.43 2613.29 3768.28 3811.20 3886.74 3990.74

Calculation of Invested Capital 

Operating Current Assets

Cash 2182.00 2319.00 9842.00 16350.35 22079.83 26475.14 30254.54 33820.21

Cash as percentage of revenue 5737.10 5512.30 5210.70 5176.17 5197.48 5251.81 5351.06 5484.28

Normal Cash 2182.00 2319.00 5210.70 5176.17 5197.48 5251.81 5351.06 5484.28

Accounts Receivable 9458.00 8423.00 8538.00 8308.02 8342.23 8429.43 8588.72 8802.55

Financing Receivables 3170.00 2974.00 2918.00 2850.46 2862.19 2892.11 2946.77 3020.13

Inventory 2078.00 1884.00 2198.00 1942.46 1950.46 1970.85 2008.09 2058.08

Other Current assets 7491.00 6431.00 7677.00 6807.85 6835.88 6907.34 7037.87 7213.09

Prepaid expenses 0.00 0.00 0.00 1.00 2.00 3.00 4.00 5.00

Current Operating Assets 24379.00 22031.00 26541.70 25085.96 25190.25 25454.54 25936.51 26583.14

Non Interest Bearing Current Liabilities

Accounts Payable 4335.00 4889.00 5828.00 4763.80 4783.42 4833.42 4924.76 5047.37

Taxes on Earnings 711.00 706.00 634.00 634.00 634.00 634.00 634.00 634.00

Deferred Revenue 5528.00 5129.00 5154.00 4974.53 4995.02 5047.23 5142.61 5270.64

Other Accrued Liabilities 5495.00 4694.00 6314.00 5212.55 5234.02 5288.73 5388.67 5522.83

Current Operating Liabilities 16069.00 15418.00 17930.00 15584.89 15646.45 15803.38 16090.04 16474.84

Net Operating Working Capital 8310.00 6613.00 8611.70 9501.07 9543.80 9651.16 9846.47 10108.30

Plus, Net Property Plant and Equipment 8510.00 8520.00 9886.00 6878.12 3772.05 2142.84 1288.82 841.70

Intangible Assets, Net 2937.00 2057.00 1930.00 1544.00 1158.00 772.00 386.00 0.00

Capitalized PV of Operating Leases 0.00 0.00 2113.26 2279.8659 2459.6095 2653.5241 2862.7269 3088.4231

Other Operating Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Plus, Other Operating Assets, net depreciation 2937.00 2057.00 4043.26 3823.87 3617.61 3425.52 3248.73 3088.42

LT deferred revenue 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other long term liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

LT Income Tax Liability 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Less: Other Operating Liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Invested Capital 19757.00 17190.00 22540.96 20203.06 16933.46 15219.53 14384.02 14038.42

Calculation of Return on Invested Capital

NOPLAT 2702.47 2479.71 2294.43 2613.29 3768.28 3811.20 3886.74 3990.74

Beginning Invested Capital 19757.00 17190.00 22540.96 20203.06 16933.46 15219.53 14384.02

ROIC 12.55% 13.35% 11.59% 18.65% 22.51% 25.54% 27.74%

Economic Profit: Begin IC * ( ROIC ‐WACC) 

Beginning Invested Capital 19757.00 17190.00 22540.96 20203.06 16933.46 15219.53 14384.02

ROIC 12.55% 13.35% 11.59% 18.65% 22.51% 25.54% 27.74%

WACC 8.28% 8.28% 8.28% 8.28% 8.28% 8.28% 8.28%

Economic Profit  842.91553 870.30548 745.85575 2094.5348 2408.326 2625.863 2799.0807

FCF: NOPLAT+Change in  Invested Capital

NOPLAT 2702.47 2479.71 2294.43 2613.29 3768.28 3811.20 3886.74 3990.74

Add: Beg Invested Capital 19757.00 17190.00 22540.96 20203.06 16933.46 15219.53 14384.02

Less: Current Invested Capital 17190.00 22540.96 20203.06 16933.46 15219.53 14384.02 14038.42

FCF 5046.71 ‐3056.53 4951.19 7037.88 5525.13 4722.25 4336.33

Hewlett Packard Enterprise Company

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

     CV Growth 0.70%

     CV ROIC 27.74%

     WACC 8.28%

     Cost of Equity 10.87%

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

DCF Model

Discount period 1 2 3 4 5

NOPLAT  2613 3768 3811 3887 3991

Continuing Value  51289

Free Cash Flow 4951 7038 5525 4722.3 4336

Net FCF 4951 7038 5525 56011

PV of free cash flows 4572 6002 4352 40739

Value of Operations 55665

Non Operating Assets

Excess Cash 4631

Value of Non Operating Assets 4631

Non Operating Liabilities

PV of Operating Leases 2113

PV of employee stock options 48

Notes payable & short-term borrowings 691

Employee compensation & benefits 2902

Long-term debt 15103

Pension liabilities 3432

Value of Non Operating Liabilities 24290

Equity Value 36006

Shares outstanding 1743

Intrinsic Share Price 20.66

Current Share Price  16

EP Model

Periods to discount 1 2 3 4 5

Economic Profit 746 2095 2408 2626 2799

Continuing Value 36905

Net  EP  746 2095 2408 39531

PV of Economic Profit 689 1786 1897 28752

Initial Invested Capital 22541

Value of Operations 55665

Non Operating Assets

Excess Cash 4631

Value of Non Operating Assets 4631

Non Operating Liabilities

PV of Operating Leases 2113

PV of employee stock options 48

Notes payable & short-term borrowings 691

Employee compensation & benefits 2902

Long-term debt 15103

Pension liabilities 3432

Value of Non Operating Liabilities 24290

Equity Value 36006

Shares outstanding 1743

Intrinsic Share Price 20.66

Current Share Price  16

Today 4/19/2016

Next FYE 10/31/2016

Last FYE 10/31/2015

Days in FY 366              

Days to FYE 171              

Elapsed Fraction 0.467

Intrinsic Value Today 21.53

Present Value of Operating Lease Obligations (2015)

Operating

Fiscal Years Ending Dec. 31 Leases

2016 538

2017 446

2018 338

2019 283

2020 222

Thereafter 738

Total Minimum Payments 2565

Less: Interest 452

PV of Minimum Payments 2113

Hewlett Packard Enterprise Company

Weighted Average Cost of Capital (WACC) Estimation

Marginal Tax Rate 21.40%

Cost of equity Calculation

Risk Free Rate  2.62%

+

Beta* 1.65

Market Risk Premium 5.00%

= Cost of Equity 10.87%

WACC Calculation

Shares outstanding* 1742.52

MV of share $15.68

=Total MV of Equity [E] $27,322.71

MV of debt [D] 17216

Cost of Debt 5.32%

MV of equity $27,322.71

+

MV of debt 17216.258

= MV of the firm [V] $44,538.97

Cost of Equity * 10.87%

(E/V) 0.6134563

+

Cost of Debt * 5.32%

(1‐Marginal tax Rate) 78.60%

(D/V) $0.39

= WACC 8.28%

Hewlett Packard Enterprise Company

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

Period of Discount  1 2 3 4 5

EPS 1.69$       1.83$      1.98$      2.16$      2.35$          

Key Assumptions

   CV growth 0.70%

   CV ROE 8.26%

   Cost of Equity 10.87%

Future Cash Flows

     P/E Multiple (CV Year) 9.00

     EPS (CV Year) 2.35$          

     Future Stock Price 21.16$       

     Dividends Per Share 0.22$       0.24$      0.26$      0.28$     

     Future Cash Flows 0.22$       0.24$      0.26$      0.28$      21.16$       

     Discounted Cash Flows 0.20$       0.19$      0.19$      0.19$      14.01$       

Intrinsic Value 14.77$    

Price Today $15.68

Intrinsic Value Today 15.39

Hewlett Packard Enterprise Company

Relative Valuation Models

EPS EPS

Ticker Company Price 2016E 2017E P/E 16 P/E 17

EMC EMC Corp $26.50 $1.86  $1.96  14.2          13.5          Weights

WDC Western Digital $48.88 $5.89  $6.53  8.3            7.5            Enterprise Group Enterprise Services

STX Seagate Technology $34.64 $2.77  $3.44  12.5          10.1          0.7 0.3

NTAP NetApp $26.22 $2.17  $2.34  12.1          11.2         

IBM IBM 138.19$   $13.48  $14.16  10.3          9.8           

HPQ Hewlett Packard Inc, 11.24$     $1.59  $1.65  7.1            6.8           

CSCO Cisco 26.77$     $2.29  $2.39  11.7          11.2         

VMW Vmware 50.01$     $4.11  $4.36  12.2          11.5          Implied Value:

Average 11.0        10.2           Relative P/E (EPS16) 22.37$                        

   Relative P/E (EPS17) 22.32$                         

HPE Hewlett Packard Enterprise Company $15.68 $1.69  $1.83  9.3            8.6           

Implied Value:

   Relative P/E (EPS16)  $    18.70 

   Relative P/E (EPS17) 18.66$    

Relative Valuation Models

EPS EPS

Ticker Company Price 2016E 2017E P/E 16 P/E 17

CSC Computer Science Corporation $30.69 $2.47  $2.75  12.4          11.2         

WIT Wipro $11.95 $0.55  $0.59  21.7          20.3         

INFY Infosys $18.37 $0.89  $0.96  20.6          19.1         

18.3        16.8       

HPE Hewlett Packard Enterprise $15.68 $1.69 $1.83 $9.26 $8.56

Implied Value:

   Relative P/E (EPS16)  $    30.94 

   Relative P/E (EPS17) 30.86$    

Hewlett Packard Enterprise Company

Key Management Ratios

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Liquidity Ratios

Current Ratio (Current Assets/ Current Liabilities) 1.17 1.11 1.41 1.84 2.13 2.34 2.51 2.65

Cash Ratio (Cash/ Current Liabilities) 0.10 0.12 0.44 0.83 1.12 1.33 1.49 1.63

Quick Ratio (Cash + Other Liquid Assets) / current liabilities 0.56 0.54 0.83 1.25 1.54 1.75 1.92 2.05

Activity or Asset‐Management Ratios

Asset Turnover Ratio (Sales/Total Assets) 0.83 0.85 0.64 0.65 0.63 0.62 0.61 0.60

Inventory Turnover Ratio (Sales/Total Inventory) 28 29 24 27 27 27 27 27

Receivables Turnover Ratio (Sales/Average Accounts Receivable) 6.07 6.42 6.50 6.19 6.22 6.20 6.17 6.15

Financial Leverage Ratios

Debt‐to‐Equity Ratio (Total Debt/Total Equity) 2% 1% 51% 48% 46% 44% 42% 39%

Equity Ratio (Total Equity/ Total Assets) 56% 57% 42% 45% 47% 48% 49% 51%

Interest Coverage (Operating Income) / (Interest Expense) 36.44 25.66 28.74 53.84 56.86 59.93 63.00 66.00

Profitability Ratios

Return on Assets (Net Income/Total Assets) 2.98% 2.53% 3.03% 3.67% 3.78% 3.90% 4.04% 4.17%

Return on Equity (Net Income/Shareholders Equity) 5.34% 4.43% 7.26% 8.12% 8.12% 8.14% 8.20% 8.26%

Gross Margin (Revenue‐COGS)/Revenue 27.44% 28.37% 28.67% 28.62% 28.62% 28.62% 28.62% 28.62%

EBIT Margin (EBIT/Sales) 5.15% 4.24% 2.92% 7.32% 7.73% 8.15% 8.57% 8.98%

Profit Margin (Net Income/Sales) 3.57% 2.99% 4.72% 5.65% 5.97% 6.30% 6.63% 6.95%

Payout Policy Ratios

0 0 0 33.51% 32.32% 31.13% 29.91% 28.73%

Payout Ratio (Divident Payout Ratio) 0 0 0 12.99% 12.99% 12.99% 12.99% 12.99%

Total Payout Ratio (Dividends paid + Repurchases)/NI

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  26

Average Time to Maturity (years): 5.23

Expected Annual Number of Options Exercised: 5

Current Average Strike Price: 26.06$         

Cost of Equity: 10.87%

Current Stock Price: $15.68

2016E 2017E 2018E 2019E 2020E 2021E 2022E

Increase in Shares Outstanding: 5 5 5 5 5 5 5

Average Strike Price: 26.06$          26.06$          26.06$          26.06$          26.06$          26.06$          26.06$         

Increase in Common Stock Account: 130               130               130               130               130               130               130              

Change in Treasury Stock 600 600 600 600 600

Expected Price of Repurchased Shares: 15.68$          17.38$          19.27$          21.37$          23.69$         

Number of Shares Repurchased: 38                  35                  31                  28                  25                 

Shares Outstanding (beginning of the year) 1,743 1,709 1,680 1,654 1,631

Plus: Shares Issued Through ESOP 5 5 5 5 5

Less: Shares Repurchased in Treasury 38                  35                  31                  28                  25                 

Shares Outstanding (end of the year) 1,709 1,680 1,654 1,631 1,610

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol HPE

Current Stock Price $15.68

Risk Free Rate 1.50%

Current Dividend Yield 1.68%

Annualized St. Dev. of Stock Returns 26.80%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

$0‐$9.99  0.211 6.00 4.00 9.08$          2$                       

$10‐$19.99  7.366 14.00 4.80 3.94$          29$                     

$20‐$29.99  10.851 26.00 4.90 1.15$          12$                     

$30‐$39.99  6.776 37.00 6.80 0.74$          5$                       

$40‐$49.99  0.813 45.00 1.40 0.00$          0$                       

$50‐$59.99  0.161 52.00 2.20 0.00$          0$                       

Total 26 26.06$         5.23 1.62$          48$                     

Sensitivity Analysis

Beta

20.66 0.8 1 1.2 1.4 1.65 1.8 2 2.2 2.4 2.6

4% 40.65 35.85 31.89 28.59 25.14 23.36 21.26 19.42 17.79 16.33

4.25% 39.36 34.53 30.59 27.31 23.90 22.15 20.09 18.28 16.68 15.26

5% 38.13 33.29 29.36 26.11 22.75 21.02 18.99 17.22 15.66 14.28

4.75% 36.96 32.12 28.21 24.99 21.67 19.97 17.98 16.25 14.72 13.37

Risk Premium 5% 35.85 31.01 27.13 23.94 20.66 18.99 17.04 15.34 13.85 12.53

5.25% 34.79 29.97 26.11 22.95 19.72 18.08 16.16 14.50 13.04 11.74

6% 33.78 28.97 25.14 22.02 18.84 17.22 15.34 13.71 12.28 11.02

5.75% 32.81 28.03 24.23 21.14 18.01 16.42 14.57 12.97 11.57 10.34

6% 31.89 27.13 23.36 20.31 17.22 15.66 13.85 12.28 10.91 9.70

6.25% 31.01 26.27 22.54 19.53 16.49 14.95 13.17 11.63 10.29 9.10

Beta

20.66 0.8 1 1.2 1.4 1.65 1.8 2

0.00% 32.23 28.25 24.98 22.23 19.36 17.88 16.12

0.25% 33.41 29.16 25.69 22.80 19.80 18.26 16.44

0.50% 34.71 30.16 26.47 23.41 20.27 18.66 16.76

CV Growth 0.70% 35.85 31.01 27.13 23.94 20.66 18.99 17.04

1.00% 37.73 32.42 28.21 24.78 21.30 19.53 17.48

1.25% 39.49 33.72 29.19 25.54 21.87 20.02 17.87

1.50% 41.46 35.16 30.27 26.37 22.48 20.53 18.29

1.75% 43.69 36.75 31.45 27.27 23.14 21.09 18.73

2.00% 46.22 38.53 32.76 28.25 23.85 21.68 19.21

2.25% 49.12 40.53 34.20 29.33 24.62 22.32 19.71

2.50% 52.47 42.80 35.81 30.51 25.46 23.01 20.26

2.75% 56.39 45.38 37.60 31.82 26.37 23.76 20.84

3.00% 61.05 48.36 39.63 33.27 27.37 24.58 21.47

CV growth of NOPLAT

20.66 0% 0.25% 0.50% 0.70% 1.00% 1.25% 1.50%

6.00% 30.04 31.07 32.19 33.17 34.78 36.27 37.94

6.50% 27.07 27.91 28.81 29.60 30.88 32.06 33.36

WACC 7.00% 24.52 25.21 25.95 26.59 27.63 28.57 29.61

7.50% 22.30 22.88 23.50 24.02 24.87 25.64 26.47

8.28% 19.38 19.82 20.28 20.68 21.32 21.89 22.50

8.50% 18.65 19.06 19.49 19.86 20.45 20.97 21.54

9.00% 17.12 17.47 17.84 18.15 18.64 19.08 19.56

9.50% 15.75 16.05 16.36 16.63 17.05 17.42 17.82

10.00% 14.52 14.77 15.04 15.27 15.63 15.94 16.28

WACC

20.66 6% 6.50% 7% 7.50% 8.28% 8.50% 9%

11% 51.91 46.73 42.37 38.64 33.80 32.61 30.14

12% 47.35 42.56 38.53 35.08 30.61 29.51 27.22

13% 42.78 38.39 34.68 31.52 27.41 26.40 24.30

14% 38.22 34.21 30.84 27.96 24.22 23.29 21.38

SG&A 15.11% 33.15 29.58 26.57 24.01 20.67 19.84 18.13

16% 29.08 25.87 23.15 20.84 17.82 17.08 15.54

17% 24.52 21.69 19.31 17.28 14.63 13.97 12.62

18% 19.95 17.52 15.47 13.71 11.43 10.87 9.70

19% 15.38 13.35 11.62 10.15 8.23 7.76 6.78

20% 10.82 9.17 7.78 6.59 5.04 4.66 3.86

WACC

20.66 6% 6.50% 7% 7.50% 8.28% 8.50% 9%

Cost of products 20.00% 52.22 47.65 43.82 40.56 36.36 35.33 33.19

22.00% 43.09 39.30 36.13 33.44 29.97 29.11 27.35

24.91% 29.80 27.16 24.95 23.08 20.66 20.07 18.85

26.00% 24.82 22.61 20.76 19.19 17.18 16.69 15.67

28.00% 15.69 14.26 13.07 12.07 10.79 10.48 9.83

30.00% 6.56 5.91 5.39 4.95 4.40 4.26 3.99

32.00% ‐2.57 ‐2.43 ‐2.30 ‐2.17 ‐2.00 ‐1.95 ‐1.85

34.00% ‐11.71 ‐10.78 ‐9.99 ‐9.30 ‐8.39 ‐8.16 ‐7.69

36.00% ‐20.84 ‐19.13 ‐17.67 ‐16.42 ‐14.78 ‐14.37 ‐13.53

WACC

20.66 6% 6.50% 7% 7.50% 8.28% 8.50% 9%

30% 102.71 93.79 86.31 79.94 71.70 69.67 65.47

Cost of Services 35% 79.88 72.93 67.10 62.13 55.71 54.14 50.88

40% 57.05 52.06 47.88 44.33 39.73 38.61 36.28

45.96% 29.83 27.19 24.97 23.10 20.69 20.10 18.87

50% 11.38 10.32 9.45 8.71 7.77 7.55 7.08

55% ‐11.45 ‐10.54 ‐9.77 ‐9.10 ‐8.21 ‐7.98 ‐7.52

60% ‐34.28 ‐31.41 ‐28.98 ‐26.90 ‐24.19 ‐23.52 ‐22.12