Tuesday, August 04, 2009

SAVVIS (NASDAQ:SVVS): Upgraded to Overweight at Morgan Stanley

Morgan Stanley is out with a very nice call on SAVVIS (NASDAQ:SVVS) upgrading the shares to Overweight from Equal-Weight and establishing a $21 price target.

As one of the few pure plays in both the managed hosting and colocation space, SAVVIS should see a revenue inflection point this year due to:

1) a favorable supply / demand imbalance for data center space;

2) robust adoption rates in the near term for proximity hosting; and

3) the encouraging long-term growth outlook for data center industry demand due to factors such as cloud computing.

Morgan Stanley believes that SAVVIS represents a turnaround story from last year as management has raised guidance for each of the last two quarters, and they believe the company should generate strong free cash flow for 2009. In firm's view, the stock trades at a relatively inexpensive 2011e EBITDA multiple of 5.1x given the encouraging growth prospects in the data center space.

What's new: Morgan Stanley rates SAVVIS Overweight as there is 43% upside implied by their price target. Their 2009 EBITDA estimate of $209.2M is at the high end of management’s newly raised guidance and $7.4M above consensus; 2009 FCF estimate of $43.7M is near the high end of guidance. Firm notes that the stock has a 16% recurring free cash flow yield, higher than Equinix and the tower stocks (AMT, CCI, and SBAC). SAVVIS cited an improving environment overall and a 4Q09 recovery for revenues and EBITDA, consistent with their expectations. Despite expected revenue pressure, 2Q EBITDA (ex a one time early termination fee) of $48.6M was ahead of Morgan's $46.1M estimate and consensus of $43.9. Cash gross margins came in at 45.4%, better than firm's 43% estimate. The recently announced 105k square foot data center expansion in Weehawken, NJ (35k sq ft expected for completion by 2Q10) should position the company for growth in proximity hosting.

Notablecalls: Morgan Stanley's Simon Flannery has done a pretty good job with this call - for obvious reasons I can reproduce only a miniscule part of it on the page. If you can get your hands on the full copy, I suggest you read it.

This call has many of the traits I usually look for in a favourable situation/call:

- Valuation (SVVS is trading well below those of say EQIX)

- The chart (new highs are coming)

- Upgrade from a tier-1 firm (MSCO in this case). And it really looks like they have put some work into it.

The only missing part in my book is a n-t catalyst (although the analyst is hinting SVVS may raise guidance next time they report).

All in all, I think this is a terrific call and will push the stock up by 6-8% today. The futures are looking down at the moment, that's my only worry apart from getting decent fills.

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