Cash Rich Company Ripe For Activism

| About: NetApp, Inc. (NTAP)
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The storage market has been a tough one to own over the last two and a half years. NetApp (NASDAQ:NTAP) is no different. The stock is down 24% since the start of 2011, while the Nasdaq composite is up 35% over that time period. NetApp is a provider of storage systems and data management, but the intriguing part is that the company is a cash rich company.

The company has $6.9 billion in cash. That's $23 in cash per share, a 55% cash to price ratio. What's more is that its current assets more than cover its total liabilities (not just current liabilities). The current net asset value per share for the company is $5.25, meaning that current assets less total liabilities equals $1.9 billion.

As a quick overview, NTAP offers storage hardware and data management software to enterprises. Basically, they help companies manage data, which is a solid business model given the rapidly rising amount of data that's passing between companies and individuals these days.

One of the real benefits to storage companies for the near future should be the return of the enterprise customer to the industry. As IT budgets for storage products begins to increase, NetApp should prove to be one of the biggest benefactors. This comes as companies will start to move from cost cutting mode to revenue generation mode.

NTAP gets over 60% of revenues from the file and network attached storage market, but one buzzword will be key for the stock, cloud computing. As more companies shift to this business model, it should be long-term positives for NTAP. How? Enter cloud network attached storage. This new market should be a big draw for companies looking to lower storage costs via the storage-as-a-service model.

Show me the money

As mentioned, the company has a pile of cash. So much cash that activist investors are getting involved to help free up that cash for shareholders. The company is making headway in returning cash to shareholders; this includes the company's 1.4% dividend yield and its newly initiated $1.6 billion share buyback plan (initiated back in May). This new $1.6 billion buyback plan is in addition to the remaining $1.4 billion left on the company's existing plan. The company plans to complete its $3 billion in buybacks within the next three years -- that's over 20% of NTAP's shares outstanding at current levels.

Cash abound in storage

One of the other major underrated plays in the industry includes Brocade Communications (NASDAQ:BRCD). Brocade supplies networking equipment, including storage area networking solutions for businesses and organizations.

Brocade recently posted 2Q EPS of $0.17, versus $0.15 for the same period last year. The slide was due to poorer than expected growth in storage network revenues. The company is now impressively cheap; trading at an EV/EBITDA multiple of 6.6x and a forward P/E of 10.3x.

However, the company's balance sheet isn't quite as ironclad as NTAP, but still pretty robust. Brocade has $1.76 in cash per share, meaning 22% of its market cap is covered by cash. Its net current asset value per share is just over $300 million, or $0.67 per share.

Activism still afoot

Since I last touched on NetApp and its potential to throw off cash to shareholders, activist investor Elliott Associates has gotten more involved in the company, having bought up more shares. Back in May I noted...

"Notable billionaire and activist investor Paul Singer has also gotten involved in the stock. His Elliott Associates hedge fund now owns some 1.15 million shares. Elliott is upping its pressure on NTAP for shakeup in its board of directors and for efforts to unlock shareholder value."

As of the end of 2Q, Elliott owns nearly 15.3 million shares, which is over 4% of the company. Elliott is joined by the likes of other major hedge funds Maverick Capital, which owns some 5.6 million shares, Scopia Capital 4 million shares, and George Soros 4.8 million shares. Collectively, these funds own just over 8% of the company.

We also still think that the buyout potential is still on the table for NetApp...

"Another potential outcome for NTAP includes a buyout of the company. With an enterprise value of less than $8.9 billion, NTAP could easily be an acquisition target for one of its major tech partners. Oracle (ORCL) has $33.4 billion in cash and Cisco (CSCO) an impressive $47.3 billion.

NTAP provides data storage solutions for Oracle, helping Oracle expand their databases. Meanwhile, NTAP and Cisco have been partners for over a decade. Cisco could use NTAP to provide complementary data storage solutions to its networking solutions. NTAP also distributes Cisco data center switches."

Bottom line

NTAP's circumstance is unlike that of Corvex and TW Telecom, where Corvex is pushing for a possible buyout of the company, but TW holds no meaningful moat (i.e. industry growth or cash position) to prop the company up until a buyout materializes.

NetApp is highly cash rich. Although the storage market appears to be in decline, NetApp's robust balance sheet should help the company make the necessary pivots to higher growth areas. There is also the possibility of a buyout. We believe that with a seasoned activist, Paul Singer and Elliott Associates, which is coming off a solid win at BMC Software and making headway at Hess Corp., the company stands a good chance of being "shaken-up." Whether that's a buyout or more cash to shareholders remains to be seen.

Disclosure: I am long NTAP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.