3 Reasons Citrix Systems Was Upgraded To Outperform

As such, the rating on the shares has been lifted from Market Perform to Outperform and the price target bumped from $82.50 to $95.

At the time of writing, shares of Citrix Systems were rallying 4.17 percent to $80.02.

1. Underwhelming Consensus

Analyst Philip Winslow believes the consensus estimates do not properly reflect the timing and magnitude of the impact of the forced migration to Customer Success Service.

The analyst clarified that Citrix introduced in October 2016 Customer Success Service a series of tiered support offerings intended to replace its existing Citrix Software Maintenance and Subscription Advantage agreements.

The analyst estimates at least $242 million in incremental annualized recurring revenue from the migration of existing SA contracts to the higher-priced CSS versus the company's guidance of $200+ million.

Additionally, the analyst expects 70 percent of the incremental ARR to be recognized in 2017 and 2018, as opposed to the company's suggestion that the impact will roll in over three years.

As such, Winslow said his revenue, earnings per share and free cash flow forecasts are meaningfully higher than the consensus estimates, beginning in 2018.

2. Depressed Valuation

Wells Fargo Securities noted that Citrix shares were trading near their lowest cash flow multiple (10.2 times) since the financial crisis, which is at a 44-percent discount to the overall software industry. The firm pointed that it was the lowest discount at which the stock has traded in the last 10 years.

"We view a 12.9x multiple as appropriate given that we forecast Citrix's UFCF/share to grow at a five-year forward CAGR of 13.2%," the firm said.

Additionally, the firm said it views the downside risk as relatively limited, given the depressed valuation.

3. Balance Sheet Expansion Opportunity

The firm noted that Citrix currently has a gross-debt-to-adjusted EBITDA ratio of 1.48 times. By increasing the ratio to three times, the firm said the company can still sustain an investment grade rating and raise an additional $1.4 billion in debt.

The firm believes the company can use the incremental leverage, along with its existing cash balance, to return more capital to shareholders.

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