Software Stocks

Red Hat Inc Valuation – January 2019 $RHT

Company Profile (excerpt from Reuters): Red Hat, Inc. (Red Hat), incorporated on October 17, 1998, is a provider of open source software solutions, using a community-powered approach to develop and offer operating system, virtualization, management, middleware, cloud, mobile and storage technologies. The Company operates through three geographical segments: the Americas (the United States, Canada and Latin America); Europe, Middle East and Africa (EMEA), and Asia Pacific. The Company’s products and services include infrastructure-related offerings, application development-related and other technology offerings, and consulting, support and training services.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of RHT – January 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $31,069,105,955 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.26 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 203.43% Pass
6. Moderate PEmg Ratio PEmg < 20 103.56 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 22.97 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.26 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.53 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $1.70
MG Growth Estimate 14.77%
MG Value $64.55
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $24.61
MG Value based on 0% Growth $14.43
Market Implied Growth Rate 47.53%
Current Price $175.77
% of Intrinsic Value 272.29%

Red Hat Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the low current ratio, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.86 in 2015 to an estimated $1.7 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 47.53% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Red Hat Inc revealed the company was trading above its Graham Number of $21.7. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 103.56, which was above the industry average of 50.37. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-3.81.

Red Hat Inc scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$3.81
Graham Number $21.70
PEmg 103.56
Current Ratio 1.26
PB Ratio 22.97
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 11/1/2018
Total Current Assets $2,970,491,000
Total Current Liabilities $2,363,585,000
Long-Term Debt $324,153,000
Total Assets $5,103,014,000
Intangible Assets $1,489,116,000
Total Liabilities $3,679,383,000
Shares Outstanding (Diluted Average) 186,062,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.52
Feb2018 $1.40
Feb2017 $1.39
Feb2016 $1.07
Feb2015 $0.95
Feb2014 $0.93
Feb2013 $0.77
Feb2012 $0.75
Feb2011 $0.55
Feb2010 $0.45
Feb2009 $0.39
Feb2008 $0.36
Feb2007 $0.29
Feb2006 $0.41
Feb2005 $0.24
Feb2004 $0.07
Feb2003 -$0.04
Feb2002 -$0.83
Feb2001 -$0.53
Feb2000 -$0.41
Feb1999 -$0.11

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.70
Feb2018 $1.24
Feb2017 $1.11
Feb2016 $0.95
Feb2015 $0.86
Feb2014 $0.77
Feb2013 $0.65
Feb2012 $0.56
Feb2011 $0.45
Feb2010 $0.39
Feb2009 $0.35
Feb2008 $0.32
Feb2007 $0.26
Feb2006 $0.15
Feb2005 -$0.06
Feb2004 -$0.25
Feb2003 -$0.40

Recommended Reading:

Other ModernGraham posts about the company

Red Hat Inc Valuation – March 2018 $RHT
Red Hat Inc Valuation – June 2016 $RHT
21 Companies in the Spotlight This Week – 5/9/15
Red Hat Inc. Annual Valuation – May 2015 $RHT
16 Companies in the Spotlight This Week – 4/26/14

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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