Datalink: Still Attractive After Reporting Another Great Quarter

Apr.21.11 | About: Datalink Corporation (DTLK)

Datalink Corp (NASDAQ:DTLK), a provider of Data Center Solutions to Fortune 500 and mid-tier enterprises, announced its March 2011 quarterly report after the market close yesterday. Earnings, at 16 cents, came in 5 cents above the Street consensus estimate of 11 cents and revenue, at $85.7 million, also came in above the $79.5 million estimate. For the next June 2011 quarter, the company is projecting to generate $80 million to $86 million in revenue and 9 cents to 13 cents in non-GAAP earnings versus analyst estimates of $76.8 million and 10 cents.

Revenues and earnings are continuing to come in strong since the company reported its September 2010 quarter on October 19, 2010. This was followed by strong guidance on January 18, 2010 for the December 2010 quarter, and the price of the company’s shares as a result have risen from the $3.50s to just over $9 in early February. The shares closed yesterday at $6.23, prior to the company issuing its March 2011 quarterly report, with the recent weakness attributable mainly to the company issuing 2.75 million new shares for a 21% dilution of the then-existing shareholders.

The stock, as I've explained in much more detail in a prior article, “Datalink: Lesser Known, Lower Risk Data Storage Stock Exhibiting Strong Growth”, continues to offer an attractive alternative to play the ongoing explosion in data storage and virtualization needs compared to the more popular growth ‘names’ such as F5 Networks (NASDAQ:FFIV) and Netapp (NASDAQ:NTAP), both of whom have declined significantly since the beginning of the year versus the 40% plus increase in the price of DTLK shares (even more after canceling out the effect of the 21% dilution last month). This relative out-performance for DTLK versus FFIV and NTAP (not as much VMW, which reported ‘blow-out’ numbers Tuesday after the close) was highlighted in my prior article based on their relative ‘valuation.’

At a current approximately 10 P/E, after factoring in the projection by the company for the June 2011 quarter, the stock is trading at the lower end of its own historical P/E range of 10-30 (as illustrated in my prior article on DTLK). Also, it is trading at the lower end of the 10-15+ forward P/E of its competitors that include large enterprises such as International Business Machines (NYSE:IBM), Oracle Corp (NASDAQ:ORCL), Hewlett-Packard (NYSE:HPQ) and EMC (EMC), all of which are growing much slower at near 10%. Also, data storage and virtualization hardware and software vendors such as VMware (NYSE:VMW), Netapp (NTAP), Citrix Systems (NASDAQ:CTXS), Riverbed Technology (NASDAQ:RVBD), and F 5 Networks (FFIV) that are growing at comparable 20%-40% growth rates are trading at much higher forward P/E’s of 25-40.

While the stock is not at as much of a discount as when I wrote my prior article in February, especially after the recent ‘dilutive’ public offering by the company, it still offers an attractive ‘alternative’ play in the data storage and virtualization space, and my expectation is that in the short-term the stock will attempt to recover back to the recent $8-9 range based on the strength of this quarterly report. The prior target I had set for $12 for DTLK would now be corrected to $9-10 based on the 21% dilution subsequent to my prior article.

Institutions have been net buyers of the stock recently, with 24 institutions holding a total of 4.05 million shares or 25% of the shares outstanding shares, up from 23% in the prior period. Of the three analysts covering the stock, all three recommend it as a buy. And on average, analysts expect an upside to $9.50, 52% above yesterday’s closing price of $6.23.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix® by Edgar Online® and Zacks Investment Research. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DTLK over the next 72 hours.