Jeffries Upgrades RightNow Technologies Amid the Despair

Jul.30.07 | About: RightNow Technologies, (RNOW)

In a rough tape overall, it was a crazy week to be in shares of RightNow Technologies (NASDAQ:RNOW), a maker of software to manage sales team activities, which on Wednesday evening announced sales of $26.5 million and a loss of 17 cents a share, both worse than analysts’ average expectation for $26.7 million and a loss of 12 cents.

The company also lowered its forecast for this year, to a loss of as deep as 70 cents a share, below the average estimate of 46 cents, on sales of as much as $110 million, which is just above the average estimate of $109.61 million.

The stock, which was rising sharply Tuesday ahead of earnings, promptly got trounced on the poor results, falling 15% Thursday. Friday shares were up a little, as some see value.

Jeffries & Co.’s Robert Schwartz Friday upgraded the shares to Buy from Hold on the share price decline, with a price target of $16, which is actually down from his prior price target of $17. Why Buy? Says Schwartz, “A wise colleague once produced t-shirts with the dictum 'sell certainty, buy despair.' Now is the time to put it on.” Schwartz says that despite his estimates for sales and profit going down, the company’s “fundamentals remain intact” and the current price is an attractive “entry point” at a 26x multiple of the company’s enterprise value divided by projected free cash flow next year of $17.27 million.

Schwartz notes the company has the prospect of 30% recurring revenue growth “in a market we like,” and the company “continues to do 60% of its businesses with $1 billion-plus customers,” with average deal size for its software sales rising from $52,000 to $71,000. Schwartz thinks the company may be well-positioned to beat reduced expectations for the third, September-ending quarter, and that with short-interest at 20% of the float, the stock could respond. His numbers show that free-cash-flow amount bouncing back in a big way next year from a low in free cash flow this year. And at 4x enterprise value-to-sales, the stock is cheap relative to peers, says Schwartz. At the same time, he concedes that some risks exist in RightNow’s field service operation, following the departure in April of Jay Rising, the company’s president of field operations.