This past Friday
we doubled down on Solarwinds Inc. buying 78 shares at 38.23. With strong support at $37.00 confirming
upward momentum the short-term technicals validate an entry while the long term
fundamentals remain intact. We see appreciation potential of over ~30% from
current levels. Solarwinds continues to
generate outsized free cash flow to fund M&A activity. Notably they
recently acquired Pingdom, which will allow the
company to shift performance management from
on-premise technology to the cloud. With
strong focus on international sales expansion and management actively seeking
acquisitions to expand its product portfolio Solarwinds offers opportunity at
these current levels. Compelling historical revenue growth rates, margins and a
deep loyal customer base of Information Technology professionals help us
confirm the assertion. As we look for EBIT to normalize in 2014 after
considerable investments were made in the business during the past year we believe further
revenue streams will be unleashed. Particularly regarding cloud security
management. Furthermore, Solarwinds continues to drive deeper penetration with its existing client base as most of its revenue, 62% is reoccurring. Solarwinds is
a strong company with a compelling growth story. We are maintaining a $52.00 PT,
which represents a 29x multiple to our FY14 EPS estimate of $1.70 vs street consensus
of $1.64. Currently the stock is trading at 33.5x times, slightly cheaper than
historically at 36x times. In conjunction with the company’s profitability and
earnings potential we see significant upside appreciation and reiterate a BUY
rating.
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