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Analyst Blog

Shares of Red Hat Inc. (RHT - Snapshot Report) hit a 52-week high of $58.71 on Friday, Dec 20, 2013. The bullish run reflects Red Hat’s better-than-expected third-quarter results and an optimistic guidance.

The closing price of Red Hat on Dec 20 was $56.10, representing a modest one-year return of about 3.9% and a year-to-date return of about 2.8%. The S&P 500 jumped 27.5% and 24.3%, respectively, during the same period.

Red Hat delivered a positive average earnings surprise of 15.6% over the past four quarters. This Zacks Rank #2 (Buy) stock has a market cap of $10.63 billion and a long-term expected earnings growth rate of 19.0%.

Impressive Third Quarter

Red Hat beat the Zacks Consensus Estimate on both lines in the third quarter of fiscal 2014. Earnings jumped 44.8% from the year-ago quarter to 42 cents per share.

Revenues increased 15.4% year over year to $396.5 million and were ahead of management’s guided range of $381.0 million to $384.0 million. The strong year-over-year growth in revenues was primarily driven by a 16.0% increase in subscription revenues and a 12.3% increase in revenues from training and services.

For the fourth quarter of fiscal 2014, Red Hat expects revenues in the range of $397.0 million to $400.0 million. Management expects operating margin to be around 24.5%. Non-GAAP earnings are expected to be in the range of 36 cents to 38 cents per share for the upcoming quarter.

Key Growth Catalysts

We believe that strong billings growth (up 19.0% year over year), solid product pipeline, continuing investments to expand product portfolio and partnerships with the likes of International Business Machines (IBM - Analyst Report), Google , Dell and Intel (INTC - Analyst Report) will drive growth, going forward.

Moreover, Red Hat continues to gain market share. We believe that the company has significant growth potential in the public cloud segment over the long term.

Estimate Revision

The Zacks Consensus Estimate for the fourth quarter increased a penny to 25 cents over the last 30 days. However, for fiscal 2014 and 2015, the earnings estimate remained steady at 96 cents and $1.13, respectively, over the same time frame.

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