Bull of the Day: Silicon Graphics (SGI)

The Numbers

SGI beat the Zacks Consensus Estimate of $0.02 by $0.04 for a 200% positive earnings surprise. Revenues came in a little above expectations at $152 million for a 1.2% positive revenue surprise.

SGI guided to FY16 non-GAAP EPS of $0.25-0.35, but at the mid point it was below Wall Street expectations. Revenues guidance for the year of between $600-$625M was market expectations at the midpoint.

The company also guided gross margin to be between 26% and 27%.

The next morning the company announced an agreement with Hewlett Packard Enterprise (HPE)

Description

Silicon Graphics makes and sells various servers, enterprise-class storage hardware, differentiating software around the world. Silicon Graphics International Corp. was incorporated in 2002 and is headquartered in Milpitas, California.

Earnings History

The recent earnings history for SGI is rather solid with four of the last five reports topping the Zacks Consensus Estimate.

The recent beat of 200% is one of the bigger beats, as the company has posted positive earnings surprises of 16%, 4.5% and 40% throughout the last five quarters.

The topline has been more of a mixed bag. The company posted positive revenue surprises in each of the last two quarters, but that was preceded by two misses on the topline. The largest dollar amount surprise was posted in the December 2014 quarter when revenues came in at $138M, $18M more than the $120M Zacks Consensus Estimate. Over the last three quarters the analysts have been on target, with the largest difference between the consensus and actual coming in at $3M for the September 2015 quarter.

Estimates

The FY16 Zacks Consensus Estimate has been moving higher. The number stood at a loss of $0.17 in December of last year. Following the most recent report, the number jumped higher by a dime to a loss of $0.07. That is a huge percentage move, but investors should be looking more at the move in FY17 numbers.

The FY2017 Zacks Consensus Estimate was at a low point in September of last year, as it sat at $0.01. An earnings report and more clarity on future sales and earnings helped bush the number to $0.06 in October. The most recent quarter, reported in January corresponds to another big move in estimates, as the number launched higher by more than 100% to $0.13.

Getting Aggressive

There have been indications that the market is ready to rally, and the chip segment is one that investors should be paying more attention to.

SGI is in the 62nd rated industry according to the Zacks Industry Rank. That puts the industry in the top 23%, and among its peers, SGI is the only Zacks Rank #1 (Strong Buy) stock. There are four other stocks in the industry that carry a Zacks Rank of #2 (Buy) and five others that have a #3 (Hold). .

Valuation

With negative trailing earnings and the next year expected to be negative the valuation metrics that investors normally look to are not meaningful. Forward PE and trailing PE are negative, but the industry average multiples are relatively low at 11x and 10x respectively. SGI trades at a premium in terms of price to book, with a 4.7x multiple compared to a 2.5x industry average. The price to sales multiple of 0.4x shows SGI trading at a discount to the industry average of 1.5x.

SGI is expected to see revenue growth of 15% in FY16 and FY17 while the industry average is looking at a contraction of 4.5% and then a gain of 5%. This could result in an even bigger disparity in the price to sales multiples.

Earnings growth of 91% in FY16, which ends in June, is much bigger than the -11.5% contraction that the industry is expected to show.

Chart

Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color coded lines represents analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #1 (Strong Buy) we see that estimates are moving higher.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Stocks Under $10, an investor service , where he recommends the stocks in the portfolio.

Brian also runs the brand new Zacks Game Changers where he looks for stocks that are disrupting their industries and reaping big gains.

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