Sunday, June 29, 2014

Solarwinds Inc. Double Down - Pullback Breeds Opportunity, ~30% Upside Potential

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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