Thursday, December 04, 2008

Red Had (NYSE:RHT): Jeffco upgrade to Buy; Cisco relationship on tap?

Jefferies is out with an interesting upgrade on Red Had (NYSE:RHT) taking their rating to Buy from Hold with a $16 tgt.

OK November. Checks indicate steady demand for the core RHEL products (AP, RHN, etc.), while Jboss sales continue to outperform. It seems like Red Hat is picking up some share in middleware dueto BEA/Oracle (ORCL, $16.13, Buy) dislocation and because open source solutions become relatively more attractive as budgets tighten.

Cisco relationship on tap. Industry sources indicate that Cisco's (CSCO, $16.01, Buy) upcoming line of blade servers is likely to offer RHEL as an option, perhaps even as the default OS. The KVM (non-bare metal) virtualization features in RHEL would allow any type of virtualized container to run on the Cisco blades.

Upgrade to Buy. With 100% recurring revenue including 80% off the balance sheet in any given quarter, increasing Jboss sales, and low-cost leadership, Red Hat is well-positioned to buffer the '09 spending storm. Additional revenue from a deal with Cisco would provide upside to our current estimates. The company has $3.90 in net cash per share, and on a cash flow basis, the shares are yielding about 16%.

Notablecalls: 1) Beaten down stock 2) Very low valuation (16% FCF yield is low), 1/3 of mkt cap in cash 3) A catalyst in the horizon in form of Cisco news.

RHT should see some nice buying interest following this call.

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