Companies that help other businesses save money should do well in a recession. Red Hat (NYSE:RHT) is doing exactly that.

This crimson chapeau sells cost-effective Linux solutions to replace costly, proprietary platforms like Microsoft (NASDAQ:MSFT) Windows, or traditional big-iron Unix systems from the likes of Sun Microsystems (NASDAQ:JAVA) and IBM (NYSE:IBM). As big businesses scramble to cut costs, Red Hat is getting plenty of action these days.

In the just-completed fourth quarter, Red Hat reported solid growth where it matters most, despite the global financial meltdown:


Q4 2008

Q4 2007

% Change







Net Income





Diluted EPS





Operating Cash Flow





Amounts in millions of dollars, except per-share items.

The GAAP income changes may look scary on the surface, but I like what I see overall. The shrinking profits mainly come from Red Hat scaling up its sales and marketing efforts and expanding its research team. The company is positioning itself to grow into a behemoth; in the meantime, damn the torpedoes. And while it's building a future empire, Red Hat continues to increase its cash flows. Skyrocketing sales plus ballooning cash flow equal happy Fools.

Red Hat is working on converting "free" users, who mainly use the gratis versions of Red Hat's open-source products, into paid customers. Many enterprise-class businesses in are at least trying out some Linux implementations in their testing environments, and they will need production-grade support contracts and licenses if they move into using Red Hat for production purposes.

"There's a huge market opportunity," says CEO Jim Whitehurst, who joined Red Hat after steering Delta Airlines (NYSE:DAL) out of bankruptcy as its handpicked COO. "We are tuning our marketing and sales messages to inform and attract these companies."

Sounds like a great growth plan to me. If that's not enough to whet your appetite, consider that Red Hat hasn't yet made it into the S&P 500 index, or even the S&P 400 MidCap instrument. This stock looks like it's on the bubble to make the cut in the next update, and I believe we'll see a few openings in these indices soon enough. Automated buying from index funds can be very rewarding for intrepid early shareholders.

Like virtualization expert VMware (NYSE:VMW) and on-demand business intelligence specialist Tibco Software (NASDAQ:TIBX), Red Hat is milking the recession for all it's worth, with a supreme value proposition for IT directors and CTOs everywhere. I can't think of a better time to jump on any of these bandwagons.

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