Foolish Forecast: Uptick for NetApp

Network Appliance (Nasdaq: NTAP) reports third-quarter earnings Wednesday night. The maker of data storage servers recently shuffled its management deck, so let's see what's in store for the new leadership team.

What Fools say:
Here's how Network Appliance's CAPS scoring rates against some of its peers and competitors:

	Market Cap (millions)	Trailing P/E Ratio	CAPS Rating
International Business Machines (NYSE: IBM)	$148,005	14.8	***
Hewlett-Packard (NYSE: HPQ)	$110,240	16.0	****
EMC (NYSE: EMC)	$33,510	20.7	*****
Sun Microsystems (Nasdaq: JAVA)	$15,190	20.0	***
Network Appliance	$7,600	30.6	***

Market data taken from Capital IQ, a division of Standard & Poor's, and ratings culled from Motley Fool CAPS on Feb. 12.

The last negative CAPS comment on this company came last July, from a player mainly worried about increased competition. The bulls see a great company with superior products -- and a deeply undervalued stock.

What management says:
Longtime president Tom Mendoza was just elevated to vice chairman, a newly created executive post with a mission to "be the chief customer advocate and champion of customer concerns." Taking over Tom's old day-to-day operations responsibility is Tom Georgens, who many see as the next CEO after his distinguished career at EMC and LSI (NYSE: LSI).

The rejiggled management structure makes a lot of sense, given these guys' backgrounds and proven abilities, and should give NetApp a stable platform from which to continue its impressive growth in a mature industry.

What management does:
And here's a closer look at that growth. Note the impressive sales boosts and stable gross margins. And before you snicker at the lower operating and net margins, consider the fact that NetApp spent 31% more on research and development in the past 12 months than it did a year before, easily outpacing the revenue growth. That's the way (a-ha, a-ha!) I like it.

Margins	7/2006	10/2006	1/2007	4/2007	7/2007	10/2007
Gross	60.6%	60.5%	60.6%	60.8%	60.9%	60.8%
Operating	13.7%	12.4%	11.1%	9.8%	8.5%	8.4%
Net	11.7%	11.5%	10.3%	10.6%	9.7%	9.1%
FCF/Revenue	20.4%	23.7%	26%	24.9%	25.2%	24.2%

Y-O-Y Growth	7/2006	10/2006	1/2007	4/2007	7/2007	10/2007
Revenue	32.7%	34.1%	35.4%	35.7%	28.3%	25%
Earnings	9.2%	9%	(1.2%)	11.7%	6.3%	(1.1%)

Data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Fellow Fool Tim Beyers agrees with the "undervalued!" catcalls, and he thinks that NetApp deserves much more market love than it gets these days. I can see why, too.

The company has teamed up with several top-notch distributors over the years, but its best friend now is IBM, which has been reselling NetApp storage servers for about a year. CEO Dan Warmenhoven says that the partnership "continues to gain momentum," and Big Blue is on an international tear of its own. Those two factors should combine to paint a pretty earnings picture for NetApp, where the partner sales channel is becoming a way of life.

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