Network Appliance Earnings Preview: Look For The Upward Trend To Continue

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About: NetApp, Inc. (NTAP)
by: Rick Pendergraft
Summary

Network Appliance is set to report earnings after the close on Wednesday.

The company has shown solid earnings growth in recent years and it has good management efficiency and profitability measurements.

The sentiment toward the stock is far from bullish.

Data storage company Network Appliance (NTAP) is scheduled to report earnings after the closing bell on Wednesday and I expect the stock to continue its upward trend. I want to get this out of the way right up front—Network Appliance is a recommended holding in my MarketPlace service, the Hedged Alpha Strategy.

Analysts expect the company to earn $1.15 per share on revenue of $1.6 billion. The company earned $0.99 during the same period one year ago, so analysts expect earnings growth of 16.1%.

Over the last three years, Network Appliance has averaged earnings growth of 26% per year and that's what analysts expect for fiscal 2019. The company did see earnings jump by 33% in Q2 2019, the most recent report.

Earnings have been growing faster than sales, but they have accelerated recently compared to the last few years. The average annual growth rate for the last three years stands at 2% while the most recent report showed sales growth of 7%. Analysts expect sales growth of 5.3% for the third quarter.

Network Appliance’s management efficiency and profitability measures are well above average. The return on equity is at 40.6%, the profit margin is at 19.6%, and the operating margin is at 18%.

The sentiment is far from bullish

Despite the solid fundamental performance, the sentiment toward Network Appliance is far from bullish. There are 29 analysts following the stock and only 14 of them have the stock rated as a “buy.” There are 13 “hold” ratings and two “sell” ratings. I have discussed this in the past, but want to reiterate it—companies with fundamentals as strong as Network Appliance usually see buy ratings representing 65% to 75% of total ratings.

The short interest ratio also shows that there is skepticism toward the stock. The current ratio is at 5.83 and it jumped from 3.88 in the most recent report. The current reading is the highest reading for the past year.

The put/call ratio for Network Appliance also is reflecting pessimism toward the stock with a reading of 1.17. One thing about this particular indicator that should be taken in to consideration is the total open interest. There are a total of 12,584 puts open and 10,790 calls open. While the ratio is high, the total open interest only represents 2.34 million shares and that's also the average daily trading volume. While the ratio being over 1.0 is a sign of pessimism, there isn’t enough open interest for it to move the stock sharply in either direction.

The Stock Found Support at the 104-Week Moving Average

Like almost all stocks, Network Appliance fell in the fourth quarter of 2018. The positive thing as far as I'm concerned is that the stock found support at its 104-week moving average.

The stock has rallied over the last month and a half and has gained ground for seven straight weeks, but it hasn’t reached the point where it is overbought based on the 10-week RSI or the weekly stochastic readings.

NTAP SA2.png

In fact, the oscillators are still below the 50 level, so it will take a considerable move higher for the indicators to reach overbought territory. We see on the chart above that the RSI reached oversold territory in December and that was the first time the indicator had done that since January 2016.

At that point in time, the stock was below all three of the moving averages shown and it was trading around $20 a share. The stock would go on to quadruple in price in just over two and a half years.

My Overall Take on Network Appliance

As I stated in the beginning, I'm bullish on Network Appliance and it is a recommended holding in the Hedged Alpha Strategy. The bullish stance is based on the overall picture — strong fundamentals, a long-term upward trend, and skepticism toward the stock that can help drive the price higher.

The company has beaten EPS estimates in each of the last eight quarterly earnings reports, and in most cases it led to the stock moving higher after the reports. The stock did fall after the last earnings report, but that was in November when the market was in the midst of the huge fall in the fourth quarter.

The sentiment picture toward Network Appliance has shifted slightly since that last earnings report. Analysts have become a little more bullish, the short interest ratio is higher, and the put/call ratio is about the same. There were only 10 “buy” ratings on the stock back in November compared to the 14 now. The short interest ratio was at 3.89 at the end of October and it’s at 5.83 now. The put/call ratio was at 1.28 back in November.

I expect Network Appliance to move higher after the earnings report and to continue moving higher in the coming months.

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.

Additional disclosure: Network Appliance is currently recommended in the Hedged Alpha Strategy.