OPNET Appears Nicely Priced

We maintain our Buy recommendation on the shares of OPNET Technologies Inc. (OPNT - Analyst Report), a provider of management software for networks and applications.

Given that OPNET won’t likely be approaching normalized profitability margins until the later part of fiscal 2010, we believe a P/S metric is the best valuation for the stock. With a P/S multiple of 2.1x current year estimates and 1.8x FY 2010 estimates, OPNET has the one of the lowest valuations of its peer group.

We believe that as the company demonstrates operating leverage with its business model by growing new license revenue and working through dilution from Network Physics, we expect the stock to approach the mean of its peer group, and is protected on the downside with $3.94 in cash per share. If we exclude amortization of acquired technology, a non-cash charge, the company should generate approximately EPS of $0.68 in fiscal 2010.

On this basis, the stock is currently trading at 18.4x our EPS estimate. Our enthusiasm is tempered somewhat by questions about the economy. Given encouraging first half results, we reiterate our Buy rating on OPNT shares and raise our six-month price target to $16.00, representing a P/S multiple of 2.5, above the industry mean.

Anita Mohata contributed to the report.

Read the full analyst report on OPNT