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Red Hat (RHT) is scheduled to release its 1st-quarter FY14 earnings on Wednesday, June 19. Below I have highlighted this quarter's earnings expectations as well as provided a fundamental look at the company's financial position and valuation.

Profile and Estimates

Red Hat sells open sourced enterprise software and has a market cap of $8.77 billion. Last year the company earned $150 (EPS of $0.77) million on $1.329 billion in sales. Shares trade at their 52-week low of $46.24, down 12.69% YTD and 22.93% under their 52-week high of $60.00. Analysts have a mean price target of $58.54 and a median price target of $59.00 on the shares.

This quarter, the company is expected to earn $0.31 per share (a $0.01 increase YOY) on sales of $359.8 million. Full-year expectations are an EPS of $1.34 on revenues of $1.53 billion. The company has beat the street's estimates in two of the last four quarters.

As you can see below, Red Hat has significantly underperformed when compared to the S&P 500 and its major peers.

RHT Chart

RHT data by YCharts

Analysis (Data sourced from MorningStar.com)

(click to enlarge)

Red Hat's operating efficiency, or net income percentage, hasn't deviated much from the average over the past five periods and past five years. Morningstar currently lists Red Hat's net margin at 11.3%, which is below the industry average 13.2%.

Over the last five periods Red Hat's asset efficiency hasn't moved much but over the past five years it has improved 11.8% as the company's revenue growth (21.1% average over the past three years compared with the industry average 6.4%) has outpaced the additional asset purchases.

Red Hat's current ROE of 9.87% is below the industry average 15.5%.

Other Notable News / Financial Ratios

  • Over the past six months, there have been 11 insider sells (204,207 shares sold) and zero buys.
  • Recently, there have been talks (unconfirmed) of a potential bid for the company by Cisco (CSCO), IBM and Oracle (ORCL).
  • P/E of 59.9, P/B of 5.8 and P/S of 6.8 are all above the industry's 36.2, 4.3 and 3.8 respectively.

Bottom Line

Fundamentally, the Dupont analysis shows some small improvements and mostly favorable trends as far as the company's internal performance goes but, it's hard to not walk away with the feeling that the company's current valuation is ahead of Red Hat's fair value. Keep an eye on earnings this coming Wednesday for new developments.

Source: Red Hat's Q1 Earnings Preview