Novell: Q3 Earnings Please Investors

Guest blogger: Larry Schutts, vice president of Stockwinners.com and a contributing editor for Theflyonthewall.com. Larry looks for stocks with technical and fundamental characteristics indicating gains in the next 30 days. However, price movements may be volatile. He includes a stop-loss price in each post. Consider selling a position should the stop-loss be violated.

The key to the effectiveness of network software is the experience of the provider. There is an outfit in Waltham, Massachusetts that shapes up pretty good along that line. It has been in business for nearly a quarter of a century and serves more than 50,000 customers.

Novell Inc. (NOVL) is engaged in the development, implementation and support of mixed source and open source business software. The firm's flagship NetWare operating system integrates corporate networks, connecting servers with PCs, storage systems and printers.

Novell also provides network management software, directory services products, a version of the Linux operating system and IT consulting services. Strategic partners include Dell (DELL), Intel (INTC) and Oracle (ORCL).

The company pleased investors last week, when it reported fiscal Q3 EPS of five cents and revenues of $243 million. Analysts had been looking for two cents and $234.8 million. Management also guided FY07 revenues to $925-$955 ($942.42M consensus).

First Albany subsequently spoke well of the stock, citing an improved balance sheet, a low valuation and potential future restructuring/buyback catalysts. The NOVL price popped on the news and has since settled into a bullish "flag" consolidation pattern. Equities frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the issue with two "strong buys," three "buys," seven "holds" and one "sell." Analysts expect a 43% growth rate through the next year. The NOVL Price to Sales ratio (2.68), Price to Book ratio (2.23), Price to Free Cash Flow ratio (6.70) and EPS Growth rate (66.67%) compare favorably with industry, sector and S&P 500 averages. Institutional investors hold about 73% of the outstanding shares. The stock is one of those used to calculate the S&P 500 Index. Over the past 52 weeks, it has traded between $5.70 and $8.26. A stop-loss of $6.35 looks good here.