By Craig Bowles
Red Hat, Inc. (NYSE:RHT) is slated to report 4Q 2014 earnings after the bell on Thursday, March 27. The earnings release is expected at approximately 4:05 p.m. EST, with a 5:00 p.m. webcast conference call available through Red Hat Investor Relations. Red Hat is benefiting from several positive trends, including adoption of open-source software, virtualization, data-center expansion, and cloud-computing. The company's open source products for enterprise customers received CRN's top rating for the second year in a row.
Outliers & Strategy
- Non-GAAP Earnings Per Share: The current Street estimate is $0.37, with a range of $0.36 to $0.38. (Source: Yahoo Finance). Red Hat has beaten estimates by $0.01 to $0.07 over each of the last four quarters.
- Revenues: Expectations are to increase 14.6% y/y to $398.84 mln (range $397.07 mln to $400.44 mln).
- Insiders have sold 93,267 shares the last six months, but the company has been doing $300 mln buybacks the last few years. Buyback announcements have historically occurred in late March or April, so a 2014 announcement could come any day.
- Red Hat is compared to other open source software and operating systems companies, with quarterly results possibly impacting Oracle (NYSE:ORCL) and Microsoft (NASDAQ:MSFT).
- Red Hat shares have a 1-day average price change on earnings of 9.26%. Options are pricing in an implied move of 6.29% on earnings.
- 03/21: Morgan Stanley reiterated an Overweight rating, based on a positive risk/reward into 2015 driven by accelerating growth, according to a post on Benzinga.com.
- 03/17: Red Hat was one of four companies mentioned that could gain from a bounceback in CapEx following 2013's strong year for buybacks, according to a Barron's article.
- 03/05: Red Hat Linux is now available on Amazon's secure federal cloud, according to a post on ZDNet.
- 03/04: Red Hat has added major functionality to its software suite for managing business processes, making the package an appealing choice in the enterprise market for BPM (business process management) software, according to a post on PC World.
- 02/19: Cowen upgraded Red Hat to Market Perform from Underperform, continuing a trend of more optimism since downgrades stopped last September, according to posts on StreetInsider.com.
Red Hat's stock has ranged mostly between $45.00 and $62.00 since 2011, so is now on the high side of the range. 2014 has been confined to a balance area centered at $58-$59, where the stock is currently supported by the 50-day MA. Trades above $59 have breakout potential, and below $58 risks giving back December's earnings-driven gap up. (Chart courtesy of StockCharts.com)
Analysts have shown more optimism for Red Hat the last two quarters. The broad trading range of the last two years increases the potential of an eventual breakout. Given the company has previously beaten earnings with mixed results from the stock price, earnings probably need to be above the $0.38 high side of expectations. As with all high-multiple companies, better-than-expected revenue is eventually needed to justify the optimism. The high side of analyst expectations is $400.44 mln, so anything above that with an earnings beat would be a full upside surprise.
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