NetApp: Impressive Analyst Day Targets

Summary

• NetApp updates long-term targets at an analyst day.
• The company promises to ramp up capital returns with a goal of doubling the dividend.
• Maintaining the current revenue growth is crucial to meeting this plan while a strong cash position protects downside risk.

At the analyst day on April 5, NetApp (NASDAQ:NTAP) made some rather bullish comments that might change my outlook that was slowly shifting neutral. The data storage company had slowly quit utilizing cash flows and a strong balance sheet on capital returns in a rather negative trend considering the proposed value of the stock. The proposed shift is bullish.

Source: NetApp website

Concerning Trends

My previous investment thesis urged investors to hold onto the stock around $41 despite the big rally in the prior year. NetApp had slowly turned around the business and was too flush with cash to ignore.

Now the stock is near record highs after another $20+ rally since last August changes the equation. NetApp is no longer exceedingly cheap and the company needed to signal the stock was still cheap.

Following the last quarterly report, the following net payout yields (dividend yield + net stock buyback yield) chart told a troubling story. NetApp with net cash of $2.3 billion didn't appear to see much value in the stock above $60. The net payout yield sunk to the lowest level in years below 4%. Not how the BOD was aggressive with capital returns when the stock dipped towards $20 in 2016.

NTAP data by YCharts

The signal by management appeared highly logical considering the stock now trades at close to 17x prior FY19 EPS estimates of $3.77. NetApp is no longer the bargain of the past.

Key Highlights

At the analyst meeting, NetApp surprised the market with some strong forecasts.

• FY19 EPS guidance of $3.92 based on 15% growth
• FY19 to FY21 revenue growth of mid-single digits
• FY19 to FY21 EPS growth of 15%
• Goal of doubling the dividend to $1.60 by FY21
• Stock buybacks of $4 billion by FY21

The key focus over the last couple of years was the strong capital allocation plan. The new plan helps alleviate some of the dire concerns with the future.

Source: NetApp analyst day presentation

The key numbers are the plans to double the annual dividend by FY21 to $1.60. At the current stock price, the new yield would reach 2.5%. Shifting more of the capital allocation to the dividend makes sense with the stock now trading more at a market multiple. The company though is aggressively looking at still repurchasing shares with the commitment to buy 25% of the outstanding shares by FY21. Even only spending $1 billion a year is a 5% stock buyback yield.

Data storage is a highly competitive sector. Hitting these targets requires the ability to maintain the recent return to revenue growth.

NTAP Revenue (Quarterly YoY Growth) data by YCharts

Takeaway

The key investor takeaway is that NetApp remains a core investment position as the net payout yield appears headed back up. If the tech company fails to ramp up capital returns after the analyst day promises as the stock approaches $65, investors will have the signal to exit NetApp after a long run.

Analyst’s Disclosure: I am/we are 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.