The Storage Buy-In You've Been Waiting For

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

If you don't know any better, you might think that Xyratex (Nasdaq: XRTX  ) is a dying business today.

Shares of the British storage-systems builder are down more than 13% this morning, after the company coupled a positive earnings report with a seemingly pessimistic next-quarter forecast. Third-quarter sales increased 75% year over year to stop at $430 million, while non-GAAP earnings more than tripled to $1.20 per share. Both of these figures landed comfortably ahead of Street estimates.

However management said that about $70 million of these sales came from pulling forward what would normally be fourth-quarter orders. CEO Steve Barber seems to see this as a feature, not a bug, in fawning over his company's "excellent execution."

Xyratex's largest customer, NetApp (Nasdaq: NTAP  ) , appears to have slowed down its order volume somewhat, which signals that top-shelf systems integrators like IBM (NYSE: IBM  ) , Dell (Nasdaq: DELL  ) , and EMC (NYSE: EMC  ) all increased their relative share of Xyratex orders. This company builds hardware modules, which traditional systems storage vendors then combine with their own touches and special software sauce to create the products you see in the data center.

Recent buyout battles over storage specialists such as Data Domain and 3PAR have shown us how hot the storage sector is, and these trends have also pulled Xyratex's stock way up. Shares bought a year ago are worth 57% more today, even after that steep overnight fall. In the process, the former five-star CAPS stock has turned into a three-star nobody, seemingly on valuation issues.

That's kind of ridiculous for a stock that (including last quarter's profits) trades at less than 5 times trailing earnings. As hard drive builders Seagate Technology (NYSE: STX  ) and Western Digital (NYSE: WDC  ) have shown, while certain niches of the storage market are embroiled in heated buyout battles that push their valuation up to 10 times sales, it's nearly impossible for storage experts in other areas to get any respect in this market.

Whether the market eventually corrects this obvious imbalance between business strength and market cap, or one of the big boys decides to buy out this industrywide parts provider, loading up on Xyratex today seems nearly guaranteed to produce nice returns. I'm jumping over to Motley Fool CAPS to rate this stock "outperform" over the next two to four years. If you agree with the value picture I see, feel free to do the same.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1318003, ~/Articles/ArticleHandler.aspx, 10/23/2016 12:17:37 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
DELL.DL $0.00 Down +0.00 +0.00%
Dell CAPS Rating: *
EMC $0.00 Down +0.00 +0.00%
EMC CAPS Rating: ****
IBM $149.63 Down -1.89 -1.25%
IBM CAPS Rating: ****
NTAP $33.92 Up +0.05 +0.15%
NetApp CAPS Rating: ****
WDC $53.07 Down -0.79 -1.47%
Western Digital CAPS Rating: ***
XRTX.DL $0.00 Down +0.00 +0.00%
Xyratex CAPS Rating: *****