Red Hat Gaining Momentum Ahead Of 1Q Earnings On Wednesday

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About: Red Hat, Inc. (RHT), Includes: HPQ, IBM
by: Selerity Research
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By Bimal Singh

Red Hat (NYSE:RHT) is slated to report 1Q 2013 earnings after the close of trading on Wednesday, June 20 with a conference call to follow at 5:00 p.m. EST. The actual results are typically available via press release at 4:05 p.m. EST.

Outliers & Strategy

Key measures:

  • Non- GAAP Earnings Per Share: The value for this measure may be compared with consensus estimates. In the previous conference call, Red Hat targeted Non-GAAP EPS to be in the range of $0.25 to $0.27 per share. The Street consensus is also aligned with the high end of company's estimate of $0.27. (Source: Yahoo! Finance)
  • Revenues: Red Hat previously indicated it expects revenues to be in the range of $307mln - $311mln. The current Street estimate is at the high end of the company's guidance coming in at $310.87mln implying a 17.42% increase year to date. (Source: Yahoo! Finance)

The company has met or exceeded Street estimates for the last four quarters, and is trading at 75.4x trailing earnings, suggesting investors have very high expectations going in to 1Q.

Red Hat continues to repurchase shares. In the beginning of this quarter, the company reported it has purchased 5.8mln shares, equivalent to 3% of the outstanding issues as of February 29, 2012.

Recent News

  • 06/11: According to a report on CNNMoney.com, Red Hat is planning to release a number of new products this year to meet the growing demand of cloud computing software. This will benefit Red Hat in the future by lowering production costs and increasing its overall customer base.
  • 05/24: Red Hat announced the appointment of Arun Oberoi as its new Executive VP of Global Sales and Services. Mr. Oberoi brings go to market executive experience from his global leadership roles at IBM (NYSE:IBM) and Hewlett Packard (NYSE:HPQ). The announcement comes two weeks after Red Hat expanded its operations in the Asia Pacific region due to growing market demand.
  • 05/09: Red Hat and IBM announced the two companies have achieved security certification to serve governments and financial institutions with open source technology.
  • 05/04: Stifel Nicolaus resumed coverage on Red Hat with a Buy rating and a price target of $70, according to a post on Benzinga.com, due to the company's ability to accommodate different market demands and open source technology becoming more wide stream.

Technical Review

Red Hat shares are down about 12% from the all-time high of $62.75 established in April. Over the previous five trading sessions, the stock has fluctuated in a tight trading range near the $56 mark, just shy of the 50-Day SMA resistance. If earnings surprise to the upside, Red Hat could move above this range and lift the stock toward $60.00. Should earnings miss, look for support just above the 200-Day SMA around the $50.00 mark. (Chart courtesy of StockCharts.com)

Summary

Street expectations are quite high going into 1Q 2013 earnings release given Red Hat's historical tendency to exceed expectations. The benefits of an aggressive buyback program, an expanded partnership with IBM, the addition of veteran Arun Oberoi, and growing demand in cloud-based technology are additional factors lifting the shares ahead of the coming earnings release. However, the stock is now trading around 75x trailing earnings and 32x free cash flow, following the 36.8% YTD rise in the stock price, signaling that positive news already being priced in. Against this positive backdrop, anything negative can take the stock sharply lower.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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