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NetApp: Value Investors Should Stay Away

February 16, 2012 | About:
In this article, I’ll examine NetApp (NTAP) from a value investor’s point of view based on the company fundamentals and recent earnings report. Use this basic information to conduct your own due diligence before making any investment decision.

NetApp, which engages in the design and manufacturing of networked storage solutions, and supplies enterprise storage and data management software and hardware, has been hit just like other companies in this sector by the flooding in Thailand last fall. The natural disaster has disrupted supply chains and caused a shortage of disc drives within the industry.

Looking at the basic numbers, NetApp is currently off its 52-week high of 61.02 by approximately 39 percent. The one-year chart shows the August/September 2011 slump typical of most stock charts from that volatile period. However, recovery has been slow for NetApp. The stock showed an upward trend until the flooding situation put a damper on operations and profit.

The company addressed the issue in a press release from Jan. 5, 2012 which stated:

“We work closely with our hard disk drive suppliers to stay abreast of their recovery efforts and to secure supply to meet our needs. However, similar to other vendors we have seen a negative impact to our drive costs. While we initially absorbed the cost increases to protect our partners and customers, we are no longer able to do so. Effective February 6, 2012, we will be temporarily increasing HDD list prices 5-15% over current pricing. We will continue to monitor the situation as it evolves and will provide updates as appropriate.”

Product price increases are always risky and create incentives for customers to shop around for better deals elsewhere.

From the balance sheet perspective, NetApp looks more than solid with $4.64 billion of cash on hand, operating cash flow of $1.42 billion, and total debt of $1.18 billion. The company reported net income of $165 million as last quarter ending Oct. 28, 2011.

During that most recent earnings report, revenues reported for the first six months of fiscal year 2012 totaled $2.97 billion compared to revenues of $2.4 billion for the first six months of the prior fiscal year, an increase of 23% year-over-year. Earnings per share were slightly off though showing second-quarter 2012 GAAP net income at $165.6 million, or $0.44 per share compared to GAAP net income of $175.4 million, or $0.45 per share for the same period a year ago. The company also claimed non-GAAP income figures and earnings which pushed the earnings per share up to $1.17 per share for the first six months of fiscal year 2012 compared with non-GAAP earnings of $1.05 per share for the same period of the previous fiscal year. But ballyhooing earnings based on non-GAAP practices seems questionable at best.

Looking forward, the company estimates that revenue for third-quarter 2012 will fall between $1.52 billion and $1.61 billion which would generate 18-25% year-over-year revenue growth. Third-quarter 2012 estimates came in at 0.36-.40 cents a share, significantly less than the second quarter.

This does jive with what analysts are saying about the industry. Both Gartner and IDC report that personal computer sales were down in the last quarter of 2011, due to competitors like Hewlett-Packard (HPQ). IDC researchers call a worst case scenario as a possible drop of 20 percent in PC shipment forecasts for the first quarter of 2012 because of the Thailand flooding.

Stacked up against the industry, NetApp is nearly aligned with industry averages. Its P/E of 24.38 is higher than the industry average of 20.79, and its PEG ratio is good at 1.05 compared to the industry ratio of 1.31. Competitor EMC has a higher trailing PE at 23.91 and a PEG of .90.

The next NetApp earnings report is scheduled for February 15. Until then it’s difficult to know how the supply chain disruption has interfered with profit margins, and going forward how price increases will influence customer decisions. There seems too much uncertainty surrounding the industry right now for value investors.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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Rating: 3.8/5 (14 votes)

Comments

vgm
Vgm - 2 years ago
Steve Mandel at Lone Pine has NTAP as a very significant position and has been adding.

Seth Klarman once said that if you were doing the opposite of Steve Mandel, then watch out, because Mandel was "a fabulous stock analyst".

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