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Why Datalink Corporation (DTLK) Booked Double-Digit Gains

NEW YORK (TheStreet) -- Datalink Corporation (DTLK) soared on Wednesday, booking double-digit gains. By late morning, shares had exploded 29.5% to $14.07.

A day earlier, the data center solutions company upwardly revised its fourth-quarter guidance. Management expects fourth-quarter revenue of $174 million, up from its previous range of $160 million to $170 million. Net income is expected between 33 cents and 37 cents a share, above previous guidance of 24 cents to 30 cents a share.

The revised range significantly exceeded Wall Street consensus. Analysts polled by Thomson Reuters expected net income of 25 cents a share on $164.86 million in revenue.

The Chanhassen, Minn.-based business is due to report fourth-quarter financials for the period ended December on Feb. 20.

In light of the guidance, Canaccord reiterated its "buy" rating and upped its target price to $17 from $16.

"We continue to rate DTLK a BUY ahead of accretive acquisitions and an improving IT spending backdrop," wrote Canaccord analysts in the report. "Upside for revenue and EPS were likely a combination of the completion of large deals that slipped from Q3, and a recovery for product gross margins which had come under pressure from competitive vendor pricing versus channel partners."

TheStreet Ratings team rates DATALINK CORP as a Hold with a ratings score of C+. The team has this to say about their recommendation:

"We rate DATALINK CORP (DTLK) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and increase in stock price during the past year. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 2.8%. Since the same quarter one year prior, revenues rose by 33.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Although DTLK's debt-to-equity ratio of 0.09 is very low, it is currently higher than that of the industry average. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.95 is somewhat weak and could be cause for future problems.
  • DATALINK CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. Stable earnings per share over the past year indicate the company has sound management over its earnings and share float. However, the consensus estimates suggest that there will be an upward trend in the coming year. During the past fiscal year, DATALINK CORP's EPS of $0.59 remained unchanged from the prior years' EPS of $0.59. This year, the market expects an improvement in earnings ($0.83 versus $0.59).
  • The gross profit margin for DATALINK CORP is rather low; currently it is at 21.75%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 0.59% significantly trails the industry average.
  • Net operating cash flow has significantly decreased to -$3.29 million or 154.57% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

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