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Red Hat (RHT) Selloff Provides Another Buying Opportunity, Says Top Analyst


The market can be a brutal place. Sometimes, it’s “What have you done for me lately?” Other times, it’s “What are you going to do next?” Unfortunately for investors in Red Hat (NYSE:RHT), the answer to the latter question disappointed: Though the software maker reported revenue and EPS upside in 1Q:FY19, Wall Street was not thrilled with its full-year guidance.

Specifically, Red Hat reported 1Q:FY19 revenue of $813.5 million that beat consensus estimate of $808 million and EPS of $0.72 exceeded the Street’s EPS forecast of $0.69. However, For 2Q:FY19, Red Hat’s outlook calls for revenue of $822-830 million (Street is at $854.9 million) and EPS of $0.81 (Street is at $0.89). Given a $50 million impact from FX, Red Hat lowered its FY:19 sales outlook to $3.375-3.410 billion (Street at $3.453 billion) but raised its EPS guidance to $3.44-3.48 on tax (Street is at $3.42).

In reaction, Monness’ top analyst Brian White reiterates a Buy rating on Red Hat shares, while reducing the price target to $186 (from $200), which implies an upside of 26% from current levels.

White commented, “For 2Q:FY19, we are lowering our revenue forecast to $828 million from $850 million and reducing our EPS estimate to $0.81 from $0.86. For FY:19, we are lowering our revenue forecast to $3.391 billion from $3.425 billion but raising our EPS estimate to $3.44 from $3.38. For FY:20, we are maintaining our revenue projection of $3.855 billion and our EPS forecast of $3.87.”

“We have seen Red Hat stumble before (e.g., end of 2016) and regain its balance shortly thereafter, before continuing its journey down the open source highway. Thus we believe this morning’s selloff provides yet another buying opportunity. We are lowering our FY:19 revenue estimate on FX but maintaining FY:20 forecast,” the analyst continued.

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, 5-star analyst Brian White has a yearly average return of 17.1% and a 68% success rate. White has a 24.4% average return when recommending RHT, and is ranked #101 out of 4829 analysts.

Out of the 28 analysts polled in the past 12 months, 18 rate Red Hat stock a Buy, 9 rate the stock a Hold and 1 recommends a Sell. With a return potential of 12%, the stock’s consensus target price stands at $165.16.