Elliott Pressure on NetApp a Positive: Barclays

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NetApp Inc. (NASDAQ:NTAP) is receiving some interest from famous activist hedge fund Elliott Associates. While some companies (and investors) frown upon activists (or at least certain litigious ones) many believe that great value can be unlocked by working with hedge funds to implement changes. Barclays is out with a new report and notes that they believe Elliott’s demands from NetApp are reasonable and positive. Below is a short report out today from the firm on that topic.

NetApp Inc. (NASDAQ:NTAP) activist activity a welcome development; We would like to see more cash returned to investors and changes.

On Thursday (5/16), Bloomberg reported that the activist investor Elliott Management had taken a significant stake in NetApp (see: NetApp is Said to be Pushed by Elliott to Change Board, published on 5/16 by Bloomberg) and was pressing the company to change its board and study options to boost shareholder value. The stock reacted favourably on the news, increasing 7.5% vs. a 0.50% decline in the S&P. We have been arguing for a more comprehensive and aggressive share holder return policy for NetApp. The company has a very strong balance sheet with prospects for free cash flow to stay well above net income.


NetApp Inc. (NTAP) First Quarter Earnings

NetApp Inc. (NASDAQ:NTAP) (FRA:NTA) finished the January quarter with $6.7 billion in cash or over $12/share in net cash – although NetApp still has convertible debt maturing this June for over $1.2 billion (included in our net cash calculation). That being said, we still believe that NetApp has the ability to return cash to shareholders at an accelerated rate given its ability to borrow.

We note that late last year, the company approved an additional $1.5 billion share repurchase authorization and we believe NetApp Inc. (NASDAQ:NTAP) may also look at potential acquisitions. However, given that the company’s track record with acquisitions has not been as strong, we believe NetApp should really look harder at shareholder return and consider that its business may not grow faster than a mid-single digit clip long term. We also believe another way NetApp could boost shareholder value is by implementing a restructuring or even a potential divestiture. An outside look at NetApp’s cost structure overall could yield considerable savings as well.

The company reports F4Q13 earnings next Tuesday (5/21) and we estimate EPS of $0.68 (in-line with consensus) based on revenue of $1.76 billion, also in line with consensus and guidance. We believe that ’s product growth continued to stabilize in US commercial accounts but was likely weak in Europe, OEM and in the Federal vertical. We believe that NetApp continues to benefit from a solid channel but the OEM business still seems very weak. We maintain an OW rating and target of $45 based on 45 based on 18x our FY14 EPS of $2.52.

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