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My first experience with Network Appliances (NASDAQ:NTAP) (30.74, $11.6 billion market cap, S&P 500/NASDAQ 100 member) was a presentation at a jam-packed conference in May 2001. I recall being impressed with the CEO’s discussion, but the stock was trading at 123X forward earnings. The next time I had a chance to hear the company present was a little over a year later in a huge but rather empty auditorium. The PE had dropped to 30 or so and the stock was trading about 60% lower (around 10). The presenter was the head of R&D, and the few people in the crowd, including me, struggled through his rather technical discussion. I wish I had had the conviction then to accept what is obvious now that this was a high-growth company that was totally underappreciated.

Flashing forward almost 5 years, the stock turned out to be one of the leading Technology names. Over the past 5 years, the company has grown EPS almost 50% annually on close to 30% revenue growth (mainly organic). Recently, however, the stock has not acted like the leader it has been, breaking to 9-month low on very high volume after reporting. It has now underperformed the broad market over the past 17 months:


Taking a longer look (post-bubble bottom), the stock is now trading at the lowest forward multiple since the NASDAQ bottomed in late 2002 and is well below the rather expensive 38X median. On a P/S basis, the picture is similar.


This is what I find quite interesting: The stock has traded with seasonality, but the weakness in the stock is usually a quarter later. In any case, the stock is as oversold as it has been in years:


Equally interesting, while the company reported a surprising near-term slowdown and issued a weak Q1 forecast, blaming industry conditions and not loss of market share, analysts actually raised estimates for two-years out (April 2009):


Typically, I might find this very encouraging, but the “increase” is a result of new estimates from analysts who previously hadn’t shared publicly their estimate rather than analysts actually increasing their estimates. In fact, of the six prior estimates, five declined and one increased. There are now 15 estimates, with a very wide range of 1.12 to 1.73.

With poor price momentum, “fake” rising earnings estimates and a still pretty hefty valuation, I will continue to monitor this one from my watch list. The amount of insider selling over the past year has been quite disturbing. At the same time, the company has supported the stock with a large buy-back. The balance sheet is exceptionally strong, though the spike in AR (+42% y-o-y) last quarter was a bit alarming. Perhaps the most telling is that some of the large shareholders started selling in Q1, with TCW selling 7% and Wellington punting 13%. Combined, they still owned 15% of the company.

Perhaps this is a great opportunity to get into what has been a great theme: data storage. Then again, perhaps the implications are broadly negative for the Technology sector in general. The sudden, sharp drop in near-term expectations echoes a warning that Jabil (NYSE:JBL) issued in June, 2004. It took a while, but the market figured out that JBL management actually knew what they were talking about. In any event, in the near-term, it appears that 29 is in the cards for this stock from a technical perspective, with not a lot of support beneath that level. Weak technicals, a high valuation and perhaps deteriorating fundamentals are a dangerous combination, bottom-fishers.

Disclosure: No position

Source: Is Network Appliances on Sale?