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No. of Recommendations: 17
OK, here we go!

Since this is a very risk-averse market, I am going to try to concentrate on the risk side of RHAT, Red Hat software.

RHAT is sitting on a 52 week low right now, is it a diamond in the rough? No one can say for sure, but things are looking pretty good right now. Here are some key ratios, all data includes the most recent announced earnings unless otherwise noted.

Price/Sales (TTM) 11.72
Price/Book (MRQ) 2.17

Revenue (M=Millions)
1999 - $33M
2000 - $42M
2001 - $83M

As you can see, revenue has grown at a staggering rate. I see little downside on stock price at this point, as a stock with nearly 100% trailing revenue growth, trading at 2 times book, suggests it is already undervalued.

Now, on to forward revenue growth estimates.
2002 - $146M
2003 - $206M

Based on average analyst estimates. 2002 estimates are for the current fiscal year, as RHAT's fiscal year ends in February. Note that the estimate spread is pretty large, and the average is near the lower end.


RHAT posted break even earnings this quarter, but expects to finish this fiscal year at 10 cents a share earnings. Analysts are expecting 7 cents a share.

This give us an earnings growth of 366.7% this year, based on the 7 cent estimate.

Analysts are expecting 16 cents a share EPS for the fiscal year ending 2/2003. This gives us a forward P/E of 29.375 for fiscal year ending in 2003, based on estimates, and a forward P/E of 47 based on 10 cents per share for this fiscal year.

This would give us an estimated PEG of 0.783 at the end of this fiscal year, assuming 10 cents a share earnings for the fiscal year ending 2/2002, and 16 cents a share for the fiscal year ending 2/2003.

On 03/01 we had 3,823,293 shares shorted with an average daily volume of 1,118,385, giving us a short ratio of 3.42, i.e. it would take roughly 3.42 days worth of volume to cover all the shorts. I wouldn't put too much weight into this data, since it may have changed drastically since 03/01. Average daily volume has been shrinking, along with short interest, but the short ratio is at a 12 month high.

RHAT has an $8 per share price target, with 4 analyists giving a Moderate Buy rating, and one giving a Hold rating.

On to my take on the NOS market:

Linux and Windows NT are the only Network Operating Systems (NOS) increasing their market share in the server market, according to most recent data. Microsoft has recently been cracking down on piracy by business users. This could ultimately hurt their market share, while propping up their earnings temporarily.

RHAT derives most of their earnings providing support for their version of the Linux operating system. They derive little revenue from sales of software. To me this represents a more stable source of revenue, and also one where companies will keep paying year after year, rather than a one time sale of licenses.

A recession could also possibly drive businesses looking to cut costs to Red Hat. Companies are faced with the choice: Pay for licenses, then pay for support, or use Linux and avoid any up front cost, and only pay for support.

Well, there is my take on the current situation of RHAT. It is by no means comprehensive, but hopefully it will be of use to some.

Full Disclosure: I hold a long position in RHAT. Some of the above is my opinion. My numbers may be wrong, but I've tried very hard to verify they are correct.
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