360 Degrees of Rackable

Editor's Note: In this edition of "360 Degrees," RealMoney commentators take a look at Rackable Systems (RACK Quote - Cramer on RACK - Stock Picks), which plummeted like a rock after its earnings report last week from $34.90 to $21. The momentum money has fled, but do its fundamentals make it worth picking up off the garbage heap?

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Pro-RACK, by Bob Faulkner

Rackable has lost 60% of its market value since the end of April, and roughly half of that loss came in the week since the company reported its second-quarter results July 27. The quarter was pretty good, but it was overshadowed by tepid guidance that led to a high-speed exodus by the hot-money crowd. Given the concern over the slowing economy, as well as a fair amount of mixed messages from other companies, few have been willing to step up to the name.

The fundamental questions: Are the fundamentals deteriorating, and is the bloom is off the rose? From my perspective, the answer is no.

There's nothing in the second-quarter results to suggest the company isn't executing according to plan. Both revenue and EPS were above street consensus (momentum players need that). While gross margins were essentially flat and at the high end of expectations, operating margins deteriorated a bit (-220 bps) as the company scaled up to support higher growth.

Three quarters ago, Rackable indicated it would double its direct-sales force; that target was achieved. In addition, the company launched several R&D projects to support and enhance new servers. The balance sheet strengthened nicely as well. Cash from operations was approximately $6 million, and the cash account increased $7 million. The company's accounts receivable declined $2 million, pushing days of sales outstanding down five to 47 days. Inventory declined $13 million, with days of inventory falling 21 days to 62.

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