Q3 Preview: Red Hat (RHT) Riding High on Linux, But Challenges Still Linger

Red Hat, Inc. (NYSE: RHT) shares are mimicking the company's name rather well Monday heading into its third-quarter 2012 report, expected out after the market closes. The stock is down nearly 3 percent heading into the last two hours of trade.

The Street is looking for Red Hat to report revenue of $289.62 million and earnings of 26 cents per share. The company posted a gain of 20 cents per share in the same period last year.

Shares of Red Hat made an impressive run through the last quarter, moving 26.7 percent to $50.08 at the end of November. Shares are down 6.7 percent since, but up 2.3 percent on the year. Red Hat shares have traded within a range of $31.77 to $53.42 over the last 52-week time frame.

Excluding cash, the stock is going for 36x next year's expected earnings, compared with 8.3x for Adobe (Nasdaq: ADBE) and 8.5x for Oracle (Nasdaq: ORCL).

Data from Bloomberg has 17 analysts with a Buy rating on Red Hat, six at Hold, and two with a Sell-equivalent call. The Street price target average is $51, with a low of $44 and high of $61.

Analyst Comments

• Goldman Sachs is modeling for an in-line quarter: EPS of 26 cents on revenue of $289 million. Checks indicate while Red Hat was executing better in its third quarter, the overall environment declined from last quarter. Goldman is modeling for billings of $320 million and operating cash flow of $80 million.
  
  Looking to Red Hat's fourth quarter, Goldman expects guidance of $292 million in revs and earnings of 26 cents per share.
  
  
• Wells Fargo is also looking for EPS of 26 cents, with revenue of $290 million. Amid the firm being ahead of the Street on several metrics, Wells Fargo said it sees upside potential "as the company has proven to execute in a tough macro environment, most notably in EMEA. One point of concern to note is that FX could negatively impact revenue in FQ4 with the recent volatility of the euro....Significant above-average growth is likely in Red Hat’s middleware products, notably the JBoss application server and RHEV virtualization."
  
  
• J.P. Morgan is looking for earnings of 26 cents per share and revenue of $290.1 million. Maintaining an Underweight rating into the quarter, the firm said the current stock price "implies a positive inflection point to free cash flow growth of about 25 percent, which we view as improbable." JPMorgan does not expect the opportunity from products such as virtualization and middleware to "materialize to the level most investors anticipate."

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Red Hat's past performance at Streetinsider's Red Hat's Income Statement.

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