Notable Calls

Pacific Crest is upgrading Compellent (NYSE:CML) to Outperform from Peer Perform with a $40 price target as stand alone and $65 as a takeover target. Firm names Compellent their Top 2011 Small-Cap pick. Raising 2011 and 2012 Estimates.

Compellent to benefit from rising virtualization and SAN budgets. The Pacific Crest 2011 CIO Survey (n=82) shows 66% planning to increase 2011 budgets, with the highest dollar increases expected in virtualization and SAN budgets. As a leading next-generation SAN supplier, Compellent should be a direct beneficiary of rising 2011 IT budgets. It is also well positioned with its Fluid Data Architecture and differentiated software functionality optimized for virtual environments.

Upgrading CML to Outperform on accelerating revenue and profit growth. While 2010 was an investing year, evident by CML shares that have risen just 15% year to date, Compellent will enter 2011 with multiple product upside drivers and unlevered sales capacity that should accelerate growth. They are upgrading their rating to Outperform and expect operating profits to double on 28% revenue growth.

Fully Taxed Profits Could More Than Triple in Three Years
Pacs estimates that the investments in both the next-generation hardware and software platforms that are now shipping, combined with the required sales support investments in the last years, should better position Compellent for share gains through 2014. Considering that the company has only 0.5% share of the $40 billion storage industry, our forecast of 28% to 30% annual growth could prove to be conservative. Looking at profit trends, they expect net profits to triple over the coming three years to $1.00 per share, even with the assumption that the tax rate will increase from 6% in 2010 to 35% going forward. The acquisitions of four next-generation storage suppliers— EqualLogic, 3PAR, Data Domain, Isilon Systems—further validate the increasing requirements for modern storage systems and novel approaches that can support new virtual, video and cloud workloads over the next decade.

See Upside to $40 on Standalone Basis and $65 on Takeout
Establishing a fair value on Compellent—given that the company is still in the relatively early stages of development, with only 0.5% share of the $40 billion storage market and a current focus on building an internal sales structure that can support a $500 million revenue base or more—will likely mask the profit potential of the business until it reaches scale. Pacs isestablishing a $40 price target based on an EV/sales multiple of 4.5x, which is a valuation methodology that is more aggressive than what they use for most of our enterprise IT hardware companies that have more mature models and are valued on earnings, not revenue levels. That said, there are four next-generation storage companies that serve as a good proxy for the value of a next-generation storage supplier, in our view. On a stand-alone basis, they estimate that a 40% discount to the average EV/sales takeout multiple of 7.7x for 3PAR, Data Domain, EqualLogic and Isilon Systems would be a reasonable starting point to value a next-generation storage supplier like Compellent. Applying a 75% discount to the takeout multiples as a downside scenario, wthey see potential downside risk in CML share price to $20, or roughly 2.0x EV/sales.


Notablecalls: So, PACS is out with a call saying SAN and virtualization budgets will increase the most in 2011. That's not exactly news but they do highlight Compellent (CML) as one of the fastest growing Enterprise IT stocks in their universe.

- They slap a Street high $40 share target (45% upside) on CML saying the co will triple EPS in 3 years.

- They say almost ALL of listed peers have been bought at valuations that would translate into $65/share for CML. That's over 100% upside.

- You have Radware (RDWR) up 18% on Israeli takeover speculation. Another Enterprise IT play.

All this is going to translate into hefty upside in CML today. I'm guessing 6-7% upside putting $29-30 levels in play.

Actionable Call Alert!