On Jun 11, 2013, Zacks Investment Research downgraded SolarWinds Inc. (SWI) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
The downgrade reflects SolarWinds not-so-impressive first quarter 2013 results as well as the dilutive N-able acquisition, which it completed at the end of May this year.
SolarWinds first quarter earnings of 34 cents per share beat the Zacks Consensus Estimate by a couple of cents. However, revenues of $72.9 million not only failed to beat management’s guided range of $74.9–$75.7 million but also lagged the Zacks Consensus Estimate of $75.0 million.
Post first quarter results, SolarWinds announced the N-able acquisition, for which the company agreed to pay $120.0 million in cash. Although the acquisition is expected to contribute $8.0 to $9.0 million in revenues for the remainder of 2013, it will lower earnings by 11 cents per share.
Currently, SolarWinds expect earnings per share in the range of $1.59 to $1.65 for the full year. Moreover, the acquisition will reduce cash balance (estimated $154.0 million at the end of second quarter compared with $274.0 million at the end of first quarter), which is a major concern in the near term.
Year-to-date, SolarWinds share price has declined approximately 24.93%.
The Zacks Consensus Estimate for the second quarter of 2013 has declined 11.4% (4 cents) to 31 cents over the last 60 days.
The Zacks Consensus Estimate for 2013 decreased 38.0% (11 cents) to $1.31 per share over the last 60 days. The Zacks Consensus Estimate for 2014 dropped 7.1% (12 cents) to $1.58 per share over the same period.
Other Stocks to Consider
Not all network management and related software technology providers are performing as poorly as SolarWinds. We recommend Advent Software (ADVS), which has a Zacks Rank #1 (Strong Buy). Netapp Inc. (NTAP) and EPIQ System (EPIQ), both having a Zacks Rank #2 (Buy), are also looking good at present.
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