Seeking Alpha
Profile| Send Message| ()  

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
Cap (Millions)

Enterprise
Value

P/2013
EPS

P/2012
EPS

EV/2013
Revenue

EV/2012
Revenue

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
Growth

EPS
Growth

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
Margin

EBIT
Margin

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
Estimates

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.

Source: Sell Xyratex Ahead Of Q3 Earnings