Quantum Corporation: Multiple Expansion Is Next

| About: Quantum Corporation (QTM)

Since my initial post in the spring, when Quantum Corporation (NYSE:QTM) shares were at $2.51, the stock plunged to a mere $1.11 during the summer swoon and now have more than tripled off their lows to a multi-year high at $3.92.

This price action is against a backdrop of strength in tech stocks, generally, and feverish takeover activity in storage names specifically, including 3par, Isilon and Compellent. Specific to QTM and emblamatic of its appeal has been recently initiated analyst coverage by 6 new firms (Northland, Gleacher, Craig-Hallum, Capstone, Wunderlich and Merriman Capital)

Company commentary on its conference call (see transcripts here) and at investor events can be summarized as follows:

  1. New de-duplication products including the DXI 4500, 6500 and 8500 series are all high quality, priced very competitively and offer better value than its principle competitor - EMC/Data Domain (EMC).
  2. Its branded tape business is poised for growth on the back of Oracle/Storage Tech (NASDAQ:ORCL) channel disruption and new products.
  3. A full year into developing its channel strategy the company has been signing new VARS for both de-dupe and tape, and those same VARS are stepping away from competitve products such as EMC and Oracle. Anecdotal evidence suggests incremental sales leading to a breakout quarter in the next 1-2 quarters.
  4. Stornext is growing strong and poised for new product introductions in the form of ready to use solutions (aka appliances) sometime early next year.
  5. Margins are set to expand both at the GM and OM lines due mainly to operating leverage arising from growth.
  6. Balance sheet risk has been reduced from threat of bankruptcy 2 years ago to ample debt service ability at a much lower overall cost of funds.

Calendar 2011 estimates are now roughly $.45. If investors view tape as accretive to earnings and enhancing their opportunity in high growth disk and software, the shares should trade up to $7.00 - $9 (15x-20x non-GAAP earnings) in the next year or so as investors re-price its shares for better growth and higher margins. At some point over the next couple of years we would expect the company to attract the interest of acquirors at a price in $10+ range if QTMs organic growth reaccelerates as discussed.

Disclosure: I am long QTM. I reserve the right to change my views without notice at any time