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Imagine easily beating estimates for the second quarter in a row and posting record revenue only to have your stock sell off 12% on the news?

Such is the reality for Xyratex Limited (XRTX), the British-based provider of enterprise class data storage subsystems and network technology to customers who are OEM (original equipment manufacturers) and disk drive manufacturers, which reported second quarter results on June 30.

Xyratex is a Deep Value Stock

When I last covered Xyratex as a value stock in April, it was trading at just 5x its forward earnings. It was cheap then.

It is dirt cheap now.

After the recent sell-off, Xyratex is now trading with a forward P/E of just 3.1. That is cheap by any comparison but it is especially cheap compared to its peer group, which is trading at 12.5x. The S&P 500, by contrast, is trading with a forward P/E of 12.8.

It's price-to-book ratio is just 1.3 and its price-to-sales ratio is only 0.3.

The Chart is Not for the Faint of Heart

So why does the chart look so crazy?

The stock has seen a sharp sell-off since April, presumably on profit taking and in response to the overall market sell-off.

Check out the 1-year chart below.

Revenue Soared in the Fiscal Second Quarter

On June 30, Xyratex reported a strong fiscal second quarter as revenue surged 134.1% to a record $455.9 million.

You can see from the prior years results, that it bests revenue even in the so-called "good" years of 2006 and 2007.

2010 revenue: $455.9 million
2009 revenue: $194.7 million
2008 revenue: $266.5 million
2007 revenue: $213 million
2006 revenue: $288.9 million

Sales in the Storage Infrastructure segment boosted the quarter as they totaled $112 million, up from just $10.5 million in the year ago period.

Outlook for the Third Quarter

The company doesn't see a slowdown in the third quarter either. Revenue is expected to be in the range of $385 to $435 million.

Earnings per share are projected in the range of 77 cents to $1.06 per share.

The analysts are extremely bullish. The third quarter consensus jumped 15 cents to 92 cents in the last week with 4 out of 4 estimates moving higher.

For fiscal 2010, it was more of the same. The Zacks Consensus rose 10% to $3.94 in the last week as 5 estimates jumped higher.

Xyratex is a Zacks #1 Rank (strong buy) stock.

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.

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