Earlier in a post titled Early Bird Gets the Worm? I highlighted what seems to be a never ending urge to merge among semiconductor companies, with two fairly large rumored deals just this week. The week started with the announcement of a fairly convoluted merger acquisition proposition from private company DELL to acquire data storage company EMC with a huge slug of debt. This has been given its blessing by influential activist investor Elliot Management.
Elliott had once set their sites on another data storage company, NetApp (NTAP), accumulating a 6% position in the stock in early 2013 with the intent to push for greater cash return. Interestingly, Elliot got their way but exited their stake a year later as the stock was lower.
What’s interesting to me about NTAP is that while sales have been flat to even down low single digits since 2012, sales at EMC haven’t been much better, in the mid to low single digits for the last couple years. And what does stick out with NTAP is the strength of their balance sheet. With a $10 billion market cap, the company has $5 billion in cash and only $1.5 billion in debt. The company has an existing $2.5 billion share repurchase program in place and pays a dividend that yields 2.15% (a tad better than the yield on the 10 year treasury.)
Even with the stock’s 17% rally off of the recent 52 week lows in late September, NTAP is down 19% on the year. $30 appears to be important technical support:[caption id="attachment_57698" align="aligncenter" width="600"] NTAP 5 year chart from Bloomberg[/caption]
On a 1o year basis, the importance of $30 is even more pronounced, as the recent break of its uptrend that has been in place since 2008 offers little support below:[caption id="attachment_57699" align="aligncenter" width="600"] NTAP 10 year chart from Bloomberg[/caption]
So the question we asked with AMAT in the earlier post, that we attempted to answer by gleaning from options open interest and volume, is whether or not the stock is on investors short list as a take-over candidate? Much like AMAT, options volumes in NTAP are at 52 week lows, while options open interest is at 6 month lows:[caption id="attachment_57700" align="aligncenter" width="600"] NTAP 1yr chart of options volume and open interest from Bloomberg[/caption]
Our Take: The stock is cheap, very cheap ex-cash, but earnings and sales growth has been very hard to come by of late. Sentiment could not be worse as there are only 6 Buy ratings on the stock, 26 Holds and 7 Sells, with an average 12 month price target of $33.77 (stock trading $33.66 as I write). That’s rather unheard of for a stock of this size with such a solid balance sheet. This is not a stock I would want to own as it appears the fundamentals have been weak and expected to get worse before they get better. But in the world we live in where big old stodgy tech companies are looking to lever up and merge, I suspect there is a ton of costs to be cut at NTAP that could increase profitability once combined with a larger entity.
Who could be an acquirer? EMC or DELL were probably the top of the list, but that is off the table, so it likely falls to IBM, CSCO or ORCL. I think its also important to remember that playing for take-overs is a very hard game, especially in a period like we have just had where most targets have caught a serious bid.
We think this is likely a chase here and would wait to take another look after what will likely be poor results and guidance when they report November 18th. But gun to head probably consider a call calendar like we did with AMAT.