Rackspace Hosting Inc. Stock Buy Recommendation Reiterated (RAX)

Editor's Note: TheStreet ratings do not represent the views of TheStreet's staff or its contributors. Ratings are established by computer based on metrics for performance (which includes growth, stock performance, efficiency and valuation) and risk (volatility and solvency). Companies with poor cash flow or high debt levels tend to earn lower ratings in our model.

NEW YORK ( TheStreet) -- Rackspace Hosting (NYSE: RAX) has been reiterated by TheStreet Ratings as a buy with a ratings score of B . The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, compelling growth in net income, robust revenue growth, largely solid financial position with reasonable debt levels by most measures and good cash flow from operations. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value.

Highlights from the ratings report include:
  • RACKSPACE HOSTING INC has improved earnings per share by 38.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, RACKSPACE HOSTING INC increased its bottom line by earning $0.55 versus $0.34 in the prior year. This year, the market expects an improvement in earnings ($0.75 versus $0.55).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Internet Software & Services industry. The net income increased by 43.1% when compared to the same quarter one year prior, rising from $17.56 million to $25.13 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 36.0%. Since the same quarter one year prior, revenues rose by 29.0%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Although RAX's debt-to-equity ratio of 0.21 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.28, which illustrates the ability to avoid short-term cash problems.
  • Net operating cash flow has increased to $109.18 million or 37.34% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 21.48%.

Rackspace Hosting, Inc. provides cloud computing services, managing Web-based IT systems for small and medium-sized businesses, and large enterprises worldwide. The company has a P/E ratio of 103.8, above the average computer software & services industry P/E ratio of 102.2 and above the S&P 500 P/E ratio of 17.7. Rackspace Hosting has a market cap of $9.29 billion and is part of the technology sector and computer software & services industry. Shares are up 55.9% year to date as of the close of trading on Tuesday.

You can view the full Rackspace Hosting Ratings Report or get investment ideas from our investment research center.

--Written by a member of TheStreet Ratings Staff.

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