We recommend selling Xyratex (XRTX) ahead of its Q3 2012 earnings release on Tuesday, October 2, for a short-term speculative trade. Our bearish call is based on a combined assessment of what we believe to be useful predictive factors for earnings surprises and post-earnings stock price movements. These factors span key variables across valuation, analyst estimate trends and technical strength.
Valuation (Overvalued)
We believe Xyratex to be overvalued both on an absolute and relative basis. On an absolute basis, based on consensus analyst estimates, Xyratex is valued with a 2013 P/E of 6.9x, which we believe to be above fair value, given its projected 2013 EPS growth of -18%, and 2013 Revenue growth of -6%. On a relative basis when compared to its publicly traded comparables, Xyratex is valued at a slight discount to LSI (LSI) on 2013 P/E, despite large gap in estimated revenue and EPS growth at LSI vs. Xyratex.
A summary comparables analysis is presented below to highlight key valuation multiples, growth, and profitability metrics between Xyratex and its comparables:
Valuation Multiples
Market | Enterprise | P/2013 | P/2012 | EV/2013 | EV/2012 | |||
XRTX | 258 | 127 | 6.9x | 5.6x | 0.1x | 0.1x | ||
LSI | 3,825 | 3,224 | 8.7x | 9.0x | 1.2x | 1.2x | ||
HILL | 62 | 22 | N.M. | N.M. | 0.1x | 0.1x |
Growth
Revenue | EPS | ||||||
FY13 | FY12 | FY11 | FY10 | FY13 | FY12 | ||
XRTX | -6% | -13% | -10% | 85% | -18% | 30% | |
LSI | 5% | 26% | 9% | 19% | 4% | 52% | |
HILL | 10% | 4% | -22% | 8% | 56% | 31% | |
Profitability
Gross | EBIT | ||||||
FY11 | FY10 | FY09 | FY11 | FY10 | FY09 | ||
XRTX | 15.3% | 17.5% | 14.4% | 2.1% | 7.7% | -1.4% | |
LSI | 47.1% | 47.1% | 40.2% | 3.3% | 1.6% | -10.7% | |
HILL | 21.1% | 17.0% | 16.1% | -11.1% | -5.2% | -5.9% | |
Sources: Company filings, Yahoo Finance
Analyst Estimate Trends (Bearish)
Current Analyst Estimates
Revenue estimates for Xyratex's current quarter range from $273mm to $350mm, with an average estimate of $316mm (-12.6% from $362mm in 3Q'11), while EPS estimates range from $0.26 to $0.62, with an average estimate of $0.44 in EPS (+4.8% vs. $0.42 in 3Q'11).
Current Quarter | ||
Revenue | EPS | |
Average | 316 | 0.44 |
Low | 273 | 0.26 |
High | 350 | 0.62 |
Year Ago | 362 | 0.42 |
% Growth | -12.6% | 4.8% |
EPS Surprise History (Bullish)
Xyratex has significantly beaten EPS estimates for the past 4 consecutive quarters.
2Q'12 | 1Q'12 | 4Q'11 | 3Q'11 | |
EPS Estimate | 0.29 | 0.26 | 0.33 | 0.17 |
EPS Actual | 0.32 | 0.40 | 0.73 | 0.42 |
% Surprise | 10% | 54% | 121% | 147% |
EPS Estimate Revisions (Bearish)
Recent analyst EPS estimate revisions have been bearish, with 3Q'12 EPS being revised down from $0.55 (60 days ago) to $0.44 (7 days ago), and full year 2012 EPS being revised down from $1.78 (60 days ago) to $1.65 (7 days ago).
FY13 | FY12 | 4Q'12 | 3Q'12 | |
Current | 1.35 | 1.65 | 0.49 | 0.44 |
7 Days Ago | 1.35 | 1.65 | 0.49 | 0.44 |
30 Days Ago | 1.48 | 1.78 | 0.51 | 0.55 |
60 Days Ago | 1.48 | 1.78 | 0.51 | 0.55 |
90 Days Ago | 1.62 | 1.68 | 0.51 | 0.47 |
Source: Yahoo Finance
Technical Strength (Bearish)
We believe Xyratex's underlying technical strength, as measured by its historical share price performance, to be bearish, with its Moving Averages and all MACD oscillators under bearish signals.
Moving Averages
· 20-Day Moving Average: Bearish
· 50-Day Moving Average: Bearish
· 100-Day Moving Average: Bearish
MACD
· 20-50 Day MACD Oscillator: Bearish
· 20-100 Day MACD Oscillator: Bearish
· 50-100 Day MACD Oscillator: Bearish
Disclaimer: Earnings Speculator is a trading advisory service designed to capture alpha by predicting post-earnings moves of stocks through a detailed analysis of key predictive factors. While our goal is to generate consistent alpha over time through employing a long-term positive probability edge in our predictions, the ultimate performance of any one of our individual stock recommendations is highly uncertain. We strongly recommend allocating no more than 2% of your trading portfolio to each of our recommendations in order to sufficiently diversify your risk and to be well positioned for long-term alpha generation through focusing on the prediction of post-earnings share price movements.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
