Paired Trade: Buy Akamai, Sell NetApp

This is the 8th in a series of ideas where I contrast a cheap security with an expensive one that otherwise shares some characteristics. So far, I am 5 for 7:

		BUY	SELL
		MPR	NLC
13-Mar		7.30	11.99
14-Aug		10.43	17.51
		42.9%	46.0%	-1.6%
		JNJ	AGN
17-Apr		53.05	49.49
14-Aug		60.08	54.38
		13.3%	9.9%	1.7%
		COLM	UA
1-May		30.36	24.00
14-Aug		36.96	23.99
		21.7%	0.0%	10.9%
		BCR	ISRG
8-May		73.52	158.77
14-Aug		73.62	223.80
		0.1%	41.0%	-20.4%
		EZPW	AAN
5-Jun		13.09	32.85
14-Aug		12.25	27.32
		-6.4%	-16.8%	5.2%
		SCVL	PSS
19-Jun		12.04	14.38
14-Aug		12.44	14.45
		3.3%	0.5%	1.4%
		HRL	DIN
9-Jul		34.09	31.80
14-Aug		37.39	23.85
		9.7%	-25.0%	17.3%
			Average:	2.1%

For reference:

• 3/14: Buy Met-Pro (MPR), Sell Nalco Holding (NLC)
• 4/18: Buy Johnson & Johnson (JNJ), Sell Allergan (AGN)
• 5/3: Buy Columbia Sportswear (COLM), Sell UnderArmour (UA)
• 5/10: Buy C.R. Bard (BCR), Sell Intuitive Surgical (ISRG)
• 6/6: Buy EZCORP (EZPW), Sell Aaron's Rents (RNT)
• 6/20: Buy Shoe Carnival (SCVL), Sell Collective Brands (PSS)
• 7/9: Buy Hormel (HRL), Sell DineEquity (DIN)

While I am not particularly excited about either the meager 2% average return or the mistake on ISRG, I will point out that each one of these paired trades was designed to be conservative. I aimed for the better balance sheet, the lower growth, the more diversification and/or the lower valuation in all cases.

Today's trade shouldn't draw some of the criticisms that past recommendations have elicited. While Akamai (AKAM) and NetApp (NTAP) certainly aren't competitors, they are both leveraged to the exploding data growth theme. Further, they are both Mid-Caps.

NetApp reports this week (8/19), while AKAM just reported. Both these stocks are on my watchlist, and I am long AKAM in a portfolio I manage as well as in my Top 20 Model Portfolio.

AKAM disappointed with its disclosure of a more aggressive pricing environment for its content delivery services. I would note that the company has long been reducing operating expenses and passing along savings to its customers (lower GM). I had never invested in AKAM until very recently and find it to have a valuation that should attract value investors. NTAP has been struggling too in a more competitive environment for its storage solutions. Here's the tape:

	AKAM	NTAP
Price 8/14/09	18.01	23.59
Market Cap (mm)	3112	7838
Enterprise Value	2695	6499
2009 YTD Price Return	19.4	68.9
2008 Price Return	-56.4	-44.0
Income Statement
Sales (ttm)	825	3406
Sales growth ttm	14%	3%
Sales growth mrq	5%	-6%
EBITDA (ttm)	350	296
EBITDA Margin ttm	42.4%	8.7%
Pre-tax Margin 2008	30	3
Avg Pre-tax Margin 2005-2007	25.0	14.0
FCF (ttm)	225	160
Balance Sheet
Equity	1681	1662
Tangible Equity	1155	935
Cash	617	2604
Cash/Equity	36.7%	156.7%
Total Liabilities	308	3810
ST Debt	0	0
LT Debt	200	1265
Net Debt/Cap	-22.2%	-45.7%
Liabilities/Current Assets	0.4	1.1
Liabilities/EBITDA	0.9	12.9
Liabilities/FCF	1.4	23.8
Valuation
PE F12M	11.3	18.6
EV/EBITDA	7.7	22.0
EV/Sales	3.3	1.9
(EV/Sales)/Pre-tax Margin	13.1	13.6
P/B	1.9	4.7
P/TB	2.7	8.4
FCF/Market Cap	9.0%	3.1%
Dividend Yield	0.00%	0.00%

While NTAP's margins are depressed, it seems that the market is betting AKAM's margins will come down a lot while NTAP's will rise. NTAP has a lot of cash, but it also has a ton of deferred revenue on the other side. This shows up in the three highlighted ratios regarding total liabilites. AKAM is a much safer play in a weak economy, while both companies should prosper in an improving economy. NTAP is a little overbought these days, but that's not so unusual in this market. Both of these companies could be acquisition candidates. My bottom-line is that AKAM is very cheap relative to NTAP.

Disclosure: Long AKAM

Comments

[Gregman2:]

Nice snap shot. Thank you.

Aug 16 12:55 PM

[Alan Brochs...:]

I forgot to mention on AKAM that it's PE (pro forma) and Cash Flow are somewhat overstated due to deferred tax credits, but I believe that they end beginning in 2011. The stock is still quite cheap (EV/EBITDA stays the same).

Aug 16 03:15 PM

[TCK:]

Was not the market up more than 20% in that same time period ?

Wondering what the 2% return looks like after commissions ?

Are "Pairs trades" really for the retail invetor ?

Aug 16 10:26 PM

[Alan Brochs...:]

TCK, as I mentioned above, the muted average return is a function of all of these trades being built on the idea that we are still in a bear market. Each trade was to improve balance sheet and/or valuation and/or to minimize exposure to growth expectations. That bias has certainly been premature. It's always easy to look at "everything but", but I don't look at the returns excluding the BCR/ISRG fiasco. I expect that the average return will look a lot better soon. My buys are good longs for the long-term. Some of the sells are "less good", while others are "bad' (they could get wiped out in a protracted recession).

As far as being "for the retail investor", I would have to say that you should go back to my original article (link above). I explain there my rationale for doing the series.

As always, I have several different goals in contributing any article to Seeking Alpha. I like to share my thoughts, which is generally the net result of my contributions - period (although I get some great feedback sometimes). With that said, I certainly don't mind the occasional institutional client that I find or that can review my historical contributions when I am prospecting them, and I also offer a product geared towards retail investors.

So, no, I do not recommend that retail investors necessarily take my advice or, more aptly, act on my ideas that I share. I do hope that any of my contributions triggers in the reader something that helps make them a better investor or at least more informed.

Aug 17 06:23 AM