Should You Buy It? Don't Tap Into NetApp Yet

It's been a rocky road for shares of Network Appliance(NTAP Quote - Cramer on NTAP - Stock Picks) in recent quarters. At Wednesday's closing price of $21.36, the stock is down 45% from its 52-week high set last May.

The company is a leading maker of network storage systems, whose earnings have declined four of the past seven quarters, because of poor internal execution. Most recently, when NetApp posted fiscal third quarter (ending January) results, management posted 28% year-over-year profit growth, but lowered first quarter earnings guidance because of lower U.S. demand.

So it was a surprise earlier this week when management guided for 15% to 20% sales growth for fiscal 2009 (ending April) at its analyst meeting. That's about three times faster than NetApp expects the overall industry to grow, but the company believes that it can offset slower U.S. sales with higher demand overseas, where it generates about 45% of total revenue.

With that in mind, I'm here to answer readers' questions: Should you buy it? Does NetApp hold value at current levels, or does the stock have more downside potential? (My prime role here at TheStreet.com is to analyze value stocks, which I do regularly for TheStreet.com Value Investor service.)

Despite the upbeat sales guidance at the analyst meeting earlier this week, the stock was downgraded Wednesday at the brokerage Robert Baird. Given management's guidance for a slow start to the new fiscal year, many investors are wary about management's ability to meet its lofty sales growth target.

The message at NetApp's analyst meeting was that revenue growth would be achievable through market-share gains, especially in faster-growing areas of the storage market, such as disk backup, virtual servers and Ethernet storage. Management is also confident that the company offers a more cost-effective product relative to competitors like EMC(EMC Quote - Cramer on EMC - Stock Picks) and Hewlett-Packard(HPQ Quote - Cramer on HPQ - Stock Picks), which should give it an advantage in a slower domestic environment.

But these initiatives will require internal investment. And as a result, NetApp guided to operating margins of 13.5% to 14% in fiscal 2009 -- including just 11% in the first half of year -- when the market was expecting 15%.

Still, the stock is not expensive, currently valued at 14.8 times expected fiscal 2009 earnings of $1.45 a share. The company also has a strong balance sheet with $773.2 million ($2.25 a share) of net cash on the balance sheet. Management pledged in August to buy back about $1.2 billion worth of stock, but the cash hoard also gives NetApp the freedom to make acquisitions or maybe even begin paying a dividend down the road.

At the end of the day, I believe that readers should continue to avoid NetApp at current levels. Management is trying to transform the company in a difficult domestic economic environment, and I don't believe that the company will be able to achieve its lofty fiscal 2009 targets.

Know What You Own: EMC operates in the data storage industry, and some of the other stocks in its field include IBM (IBM Quote - Cramer on IBM - Stock Picks) and Sun Microsystems (JAVA Quote - Cramer on JAVA - Stock Picks). These stocks were recently trading at ($114.37,-2.31%), ($16.55,-2.42%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.