Some updates on Blue Coat Systems (BCSI)

As mentioned in an earlier post, I sold half my smallish position in Blue Coat Systems (BCSI) last week, on its 20% post earnings gap up near $70. In the words of Homer Simpson "DOH!". The stock ended the week @ $85. Now that did not affect the fund performance much, simply because I had just initiated a small position in the name, pending further research but with my crack research staff of 1 (being myself), I was not able to devote enough time to this stock pre-earnings.

But some more flavor.

First a free research report from WR Hambrecht. (I am not sure if these are full research reports or just summaries but the research firm provides some nice free reports on their site; it might be worth the reader checking out to see if a company they have a position in, is covered by WR Hambrecht)

Some takeaways:

1. Firm believes company has now become a meaningful player in the Wide Area Data Services (WDS) market, joining a small group of contenders in a very large space - those contenders would be Cisco, Juniper Networks (2.1% of fund holdings), and Riverbed Technology (1.7% of fund holdings)
2. It appears BCSI's differentiation is a combo of security layered in with the WDS technology. (i.e. Riverbed is focused simply on the WDS technology) so there is a value add of a combo package that BCSI can offer.
3. BCSI has a 1000+ customer base from its NetCache business (the security) which serves as a wonderful established base to 'upsell' to.
4. Gross margins of 77.9% beat firm's estimate of 75.3%, and operating margins of 11.9%, beat firm's estimates of 9.8%

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The firm put a $90 price target at time of issuance of this research report (when the stock was $75) and it looks like that long term target could be reached by next week.

BCSI is certainly not cheap, but most good growth companies aren't. Further, the analyst estimates could still prove to be too low in out quarters/years. For example pre - earnings report the estimates for 2007 were $1.51 in 2007 and $2.11 for 2008 - via 8 analysts.
These numbers have now been bumped up to $1.95 in 2007 and $2.57 in 2008, increases of 29% and 22% respectively.

I don't have access to the old revenue estimates vs new, but one can assume they showed similar increases.

At a price of $85, BCSI now trades @ 43x 07 estimates and @ 33x 08 estimates. Compare these numbers to Riverbed which trades @ 68x 07 estimates and @ 79x 08 estimates, and relatively speaking BCSI still looks 'undervalued' in comparison. Or one could argue RVBD is overvalued.

Either way, the story looks good for Blue Coat Systems, with their evolution from security player to WDS player. After a further analysis of the company this week, and with more information, I will be trying to get back into the name on any decent sized pullbacks in price. The stock has appreciated over 40% in the past 4 sessions...

Both Riverbed and Blue Coat remains attractive acquisition targets for a company that rhymes with Wisco for example....

Long BCSI, JNPR, RVBD in fund; no personal positions