Rackable Should Jump On Surprising RBC Note

RBC Capital is out with some surprising comments on Rackable Systems (NASDAQ:RACK) saying their checks suggest the flow of orders at Rackable is improving as Amazon laps tough year-over-year comparables and other key customer relationships remain stable. Consequently, firm's revenue estimate for the quarter may prove conservative.

Based on valuation and historical EV-to-revenue multiple analysis, they estimate potential EV-to-CY 08 revenue multiples of 1.0x on upside execution and customer risk mitigation and 0.2x on downside execution. Currently, Rackable is trading at ~0.4x RBC's CY08 revenue estimate ($420 million), suggesting negative execution sentiment relative to estimates. Accordingly, they expect some near-term recovery in the shares, though the sustainability of any positive move is difficult to gauge given the customer concentration.

On a 12-month basis, the firm maintains their $13 price target as they evaluate the potential for more consistent execution beyond the current quarter. Firm maintains Sector Perform rating and Speculative risk assessment for the same reason.

Notablecalls: Wow, when was the last time you heard ANYONE say ANYTHING positive on RACK? This call is going to create some buy interest in the stock today, for sure! Grab it early on but don't overpay.

RACK's Analyst day is on Sept 6, which makes the set-up even better in my view. I see more positive coming from there than negative.