Will A Covid Recession Affect HPE’s Survival?

No. Hewlett Packard Enterprise’s stock (NYSE: HPE) can survive a Covid recession despite declining around 40% since the beginning of the year. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. Fading consumer demand, reduced discretionary spending, and stay-at-home orders, will result in minimal demand for technology and software as companies focus on core expenses. In Q2 2020 (ended April 2020) the company saw revenue fall by 16% y-o-y driven primarily by supply chain constraints and delays in customer acceptance due to Covid lockdowns.

Trefis analyzes the potential Impact Of The Covid-19 Recession On HPE with a focus on the company’s liquidity reserves and concludes that HPE has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On HPE Revenues

  • If the outbreak of the virus increases, HPE’s demand will be low until the situation improves. As a result, HPE’s revenues could decline by about 20% in FY 2020 (ends in October 2020), as a focus on core expenses by organizations will reduce the demand.
  • In addition to that, the company derives nearly 33% of its revenues from the US, which has become the epicenter of the outbreak – recording the largest numbers of Covid-19 cases across the globe.

Impact On HPE Cash Flows

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  • HPE cash flows from operations are likely to fall in FY2020 due to a fall in revenues and reduced profitability.
  • The company might have to offer software and services at a discount to keep the cash flowing.
  • Elevated costs, coupled with lower revenues, will hurt the company’s bottom line.
  • Despite these measures, we estimate that Free cash flow from operations will go down from $4 billion in 2019 to $2.7 billion in 2020. Also, with expected capital expenditures of $2.1 billion for the year, FCFO-CapEx will be $0.5 million in 2020.

Cash Balance Impact

  • This will lead to a 2020 cash balance of $4.3 million, which is higher when compared to 2019.
  • This is with the assumption that the company will not pay dividends or re-purchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, HPE can weather a recession through Q4 2020 and a 20% decline in revenues by cutting Capex, eliminating share repurchases, and suspending dividends.

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

An alternative scenario for HPE’s cash flows with a 40% decline in revenue instead is detailed as a part of our full analysis.

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