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Morgan Stanley Downgrades Red Hat, Cites Valuation

Morgan Stanley Downgrades Red Hat, Cites Valuation
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Although Red Hat Inc (NYSE: RHT) seems to be better positioned for the cloud transition than its infrastructure peers, its growth prospects are already reflected in the multiple, Morgan Stanley’s Keith Weiss said in a report. He downgraded the rating for the company from Overweight to Equal Weight, while maintaining the price target at $80.

The 1Q17 results indicated a slowdown in constant currency Red Hat Enterprise Linux (RHEL) growth to 13 percent, from 18 percent in 4Q16. Billings growth was reported at 16 percent. The FY17 guidance implied another year of declining operating margins, analyst Keith Weiss mentioned.

Related Link: Red Hat Shares Still Attractively Valued, Says Deutsche Bank

Lack Of Upside

Red Hat appears better positioned than its infrastructure peers as workloads make a transition to public and private cloud environments. Weiss added, however, that upside to billings and margins was unlikely and that sustained mid-teens billings growth, coupled with flat to down margins, limits upside to the FCF projections.

“Lacking identifiable upside catalysts, we see risk/reward from current levels as balanced and expect RHT's FCF multiple to stabilize at current levels,” the analyst wrote.

Latest Ratings for RHT

Jan 2017Wells FargoInitiates Coverage OnOutperform
Dec 2016Stifel NicolausDowngradesBuyHold
Dec 2016BMO CapitalDowngradesOutperformMarket Perform

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