NetApp (NTAP): Upgraded to Outperform at RBC Capital

October 5, 2009 8:25 AM EDT

From Notable Calls

RBC Capital is making a pretty significant call on NetApp (NASDAQ: NTAP) upgrading it to Outperform from Sector Perform with a $33 price target (prev. $26).

Firm notes their checks suggest NTAP is so far witnessing Oct-qtr revenues ahead of expectations, which should enable NTAP to not just beat Oct-qtr estimates but also to guide Jan-qtr ahead of expectations. They view NTAP as an attractive way for mid/large cap investors to play the anticipated IT spending recovery in H209. RBC expects NTAP to exude a positive business tone at its analyst day in New York City on October
8.

Current Checks Suggest Upside to Demand: RBC's checks suggest Oct-qtr is tracking ahead of plan and NTAP is seeing strength across its product portfolio but more so in mid/high-end products. Firm notes they haven't noticed any deal slippage due to loss of DDUP acquisition. While it's early in the quarter, Europe is starting to show strength for NTAP, which if sustained should yield incremental savings. The federal vertical continues to remain strong in Oct-qtr.

Key Suppliers Suggest H209 Strength: Last week, two of NTAP's key suppliers reported (Jabil and Xyratex), both suggesting enterprise demand and trends at NTAP continue to track positively. Both Jabil and Xyratex experienced better-than expected shipments for their August quarters, and both expect NetApp to remain strong through at least their November quarters.

Pricing Is Stabilizing: RBC believes the pricing environment for enterprise storage systems, while still aggressive, remains at minimum consistent with last quarter, which marked a healthy rebound from calendar 1Q09's gross margin level. This should enable NTAP to maintain healthy gross and EBIT margins.

Forward Expectations. For Oct-09 they increased their revenue and non-GAAP EPS estimates to $863.1 million (was $854.7 million) and $0.30 (was $0.28), which are above current Street estimates of $861.2 million and $0.29. In addition, they increased their FY10 revenue and non-GAAP EPS estimates to $3.58 billion (was $3.56 billion) and $1.27 (was $1.21), which are also above the street estimates of $3.53 billion and $1.22.

Notablecalls: While NTAP stock has doubled over the past 6 months, I suspect it may be setting up for another push higher. This is helped by:

- Raising consensus (I'm sure RBC won't be the only one upping their ests ahead of the qtr)

- The fact NTAP is starting to be viewed as a takeover candidate. NTAP has been as one of the few major storage players that has been able to grow market share (and revenue) over the past year or so. The larger players like EMC, IBM and HPQ may be feeling a slight sting here.

Barron's is out over the weekend noting current CEO Tom Georgens may be a willing seller (sub required)

http://online.barrons.com/article/SB125452419677460573.html

That should add some fuel to the fire.

NTAP isn't a big mover but up to 1pt of upside may be in the cards here.

PS: Check out Brocade (NASDAQ:BRCD) trading up 18% on some pretty vague takeover story from WSJ.

For more calls go to http://notablecalls.blogspot.com/

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