According to GuruFocus Real Time Picks, on March 7, Mario Gabelli (Trades, Portfolio), the chairman and chief executive officer of GAMCO Investors Inc. added Xyratex Ltd. (XRTX, Financial) at an average price of $13.17 and currently holds 742,642 shares of the stock, worth 0.05% of his portfolio.
So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity in a declining price environment.
Reduce Space and Administrative Costs
In order to help customers fulfill computing requirements, in November 2013, the firm announced the newest member of the ClusterStor family of HPC and Big Data engineered storage solutions – the ClusterStor 9000. It is projected to deliver up to 50% more performance, is half as fast as the previous top array, in the same rack space compared to previous ClusterStor generations. ClusterStor 9000 will be rolled out this year.
Strategic Acquisition
Seagate Technology (STX) has the ability to look for strategic acquisitions that easily synergize with the current operations. As a consequence, Seagate is going to acquire Xyratex, whose shares went up 27.3% on the announcement day and remain at that price level. The deal will help Seagate acquire testing equipment for its hard disk drives (HDD) along with storage systems to analyze and manage network data. It is expected that the deal will close in mid-2014, and add about $500 million or more in revenue in its fiscal year 2015.
Analyst Recommendation
The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.56%, very similar to the S&P 500.
Relative Valuation
In terms of valuation, the stock sells at a P/B of 1.2x, trading at a discount compared to an average of 1.2x for the industry. To use another metric, its price-to-sales ratio of 0.45x is below the industry average of 0.91x. Both metrics indicate that the stock is relatively undervalued to its peers.
Earnings per share (EPS) decreased in a huge amount in the most recent quarter compared to the same quarter a year ago (-$0.78 vs -$0.29). We include in the next graph the stock price because EPS often lead the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. With a ROE of -7.19% is below the industry mean of 5.06%. Other more attractive option in terms of this ratio is LSI Corporation (LSI, Financial) with a ROE of 8.68%.
Final Comment
Xyratex´s revenue growth was negative (30.22% compared to the previous quarter) and the net income has significantly decreased by 169% when compared to the same quarter one year ago, falling from -$7.94 million to -$21.37 million. On the other hand, it has a solid financial position with good debt levels and strong cash flow from operations. Apart from that, we expect the ClusterStor will grow at good rates, so I would recommend investors to consider adding the stock for their long-term portfolios.
Hedge fund gurus have also been active in the company in fourth quarter 2013. Jim Simons (Trades, Portfolio) has taken long position in the stock.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
