Why Pacific Crest Upgraded NetApp: Valuation

In a report published Wednesday, Pacific Crest analyst Brent Bracelin upgraded the rating on

from Underweight to Sector Weight, on valuation. The analyst believes that there is less than 6 percent downside to the stock. The company has been facing various challenges in 2015, including the stepping down of the CEO, following the significant miss in the May results. NetApp also revised its July EPS down to the lowest level in six years. The share price has declined 25 percent, year to date. "We estimate free cash flow could bottom at $65 million to $75 million in July, which would be the lowest level in six years on lower operating profits, restructuring costs and working capital outlays," analyst Bracelin explained, adding, "However, this should mark the bottom, followed by a meaningful snap back to normalized levels in October on tight cost controls, even assuming further declines in branded storage." The analyst believes that NetApp continues to be a high quality, although mature, franchise that is currently in decline but continues to have gross margins of over 60 percent, with strong free cash flow potential, when operating expenses have been right-sized. The EPS estimate for F2016 has been cut by 48 percent from $3.28 to $1.72. "Historically, NetApp has been quick to implement tight cost controls, which has protected EPS in the past. Further downside risk to EPS now appears nominal," analyst Bracelin added.