got a much-needed boost Monday, when First Albany upgraded shares of the Linux vendor to buy from neutral.
In recent trading, shares were up $1.30, or 11%, to $12.88 on heavy volume, reversing a slide that erased 60% of the company's share value since early June.
Once a darling of investors who believed that Linux, an open-source operating system, could successfully challenge
Windows juggernaut, Red Hat has been beaten up, in part over concerns that a price war with rival
is killing profitability.
In a note to clients, analyst Mark Murphy said that those concerns are overblown and set a price target of $15 a share. "We believe the tone of business in RHAT's November quarter supports our targets for subscription volumes and cash flow, potentially setting the stage for RHAT to report record high quarterly cash flow," he wrote.
He said the company is discounted too deeply, trading at 12 times enterprise value to operating cash flow, vs. 18 times for Novel and 17 times for
Murphy said that while average selling prices declined by 25% between August 2003 and August 2004, volume has increased by roughly 230%, "netting out very favorably in terms of revenue growth, margin improvements and cash flow generation. Furthermore, the ASP decline reflects a different product mix, different channel mix, different contract duration, different geographic mix and different volumes."
First Albany does not have an investment banking relationship with Red Hat.