RHT - Red Hat, Inc

[Palantir]

Too bad market is down, this bad boy is up though. I believe these guys have grown revenue every quarter for the past few years, and rather than this quarter's profit decline, the revenue growth seems really encouraging, as a lot of this is subscription revenue, so even if profit declines one year due to higher investment expenditure, profit in future years will be higher due to the annuity like structure.

[Guest rimm_never_sleeps]

it may be a good business. but what price to pay for it to get a "margin of safety"? that's the key to everything! Buffett buys great businesses. But he has price discipline. Like when he bought IBM. I wouldn't pay more than 20 times earnings for a company like rhat with that much technology risk. but that's me. you've done well with it. congrats.

[Palantir]

PE might be high, but if you look at OCF instead of PE, then the ratio is much lower, as OCF is about 3x Earnings, and the P/OCF Ratio comes out to be 26.5. Now if you subtract the 1.35 B in cash on their balance sheet and do EV/OCF, the ratio comes out to be a still lower 23, and the price I bought it at was closer to EV/OCF = 20. Now keep in mind, this is a fast growing firm that was trading at 20% below its all time high a few mos ago, and I think it is a pretty reasonable deal.

[Guest rimm_never_sleeps]

I don't use OCF. you don't capture cap ex with OCF. I use ebita. or ebitda - cap ex. that captures maint cap ex. I have this trading at 30 times FCF of $300m.

[Palantir]

Apparently this missed earnings or something lame like that. So stock is down like 12%, which is ridiculous. I want to go  :'( in a corner, but I do happen to have extra cash, will buy into this if it stays in the low 40s over the next few days.

[Guest valueInv]

Sold the last of my RHT holdings last week.

[Palantir]

What is your thesis for selling?

[Palantir]

Red Hat's stock is down 7% on an earnings miss. That being said, they're growing at like 15%+, and have grown revenue every quarter for the last 15 qtrs. I think this stock is *almost* undervalued.

[Guest valueInv]

Red Hat's stock is down 7% on an earnings miss. That being said, they're growing at like 15%+, and have grown revenue every quarter for the last 15 qtrs. I think this stock is *almost* undervalued.

 

Wow, I got lucky on the timing. The thesis is the same- the great disruption. The cloud is changing business models and everybody needs to transition. It is very difficult to predict who is going to transition successfully and who the winners will be. What you don't know is risk and I don't want to take risk.

 

Red Hat's core model is under threat. They are making changes but I don't know how effective they will be.

[Palantir]

Red Hat reports third quarter results

http://online.wsj.com/article/PR-CO-20131219-910654.html

 

Stock up more than 10%. No complaints.

[Palantir]

Is anyone else in this? Up 11% after earnings...

 

http://investors.redhat.com/releasedetail.cfm?ReleaseID=888387

[wisowis]

Red Hat being bought by IBM for $190/share in cash.

 

https://www.redhat.com/en/about/press-releases/ibm-acquire-red-hat-completely-changing-cloud-landscape-and-becoming-world’s-1-hybrid-cloud-provider

[oddballstocks]

Nice job to longs on this one!

[Jurgis]

~10% spread right now.

 

Might be attractive. Does this need China and EU to signoff and will they? And what's the timeframe?

 

I think I'll twiddle my thumbs a bit.

[ander]

Re: the spread, looks like the options might be an interesting way to play it. Can buy the Jan 2020, 180 strike for $7.90. So if deal closes, make $2.10 / $7.90 = 26.5% and likely long-term capital gains. If there's a topping bid, make a lot more than that. Risk is that the deal breaks, but I guess that's what the 13% spread ($190 buyout price / $168 current share price) may be implying. Any thoughts?

[walkie518]

Re: the spread, looks like the options might be an interesting way to play it. Can buy the Jan 2020, 180 strike for $7.90. So if deal closes, make $2.10 / $7.90 = 26.5% and likely long-term capital gains. If there's a topping bid, make a lot more than that. Risk is that the deal breaks, but I guess that's what the 13% spread ($190 buyout price / $168 current share price) may be implying. Any thoughts?

I bought calls this morning and am already out...the spread appears to be closing in the options market but the shares remain under valued....likely less risk there?

 

[scorpioncapital]

I wonder if arbitrage spreads embed interest rate expectations more or less than bonds.

[bizaro86]

I wonder if arbitrage spreads embed interest rate expectations more or less than bonds.

 

That's an interesting question. Since the marginal arbitrage buyer is probably using margin credit to purchase the position, the short rate during the deal is obviously important. I think in some ways they are predicting slightly different things, as the rates for margin loans mostly track (but not perfectly) the short end rates.

[ander]

I think the spread should be similar to both, and I'm guessing that the shares will probably reduce the spread in the coming weeks to something much more normal (implying high confidence that the deal closes). I think it was a little bit of an anomaly on the other strikes (did not really exist on the 185 strike, but did on 180 and lower strikes) possibly since there isn't that much volume for institutional players to make it worthwhile, but nice enough for retail investors.

 

 

Re: the spread, looks like the options might be an interesting way to play it. Can buy the Jan 2020, 180 strike for $7.90. So if deal closes, make $2.10 / $7.90 = 26.5% and likely long-term capital gains. If there's a topping bid, make a lot more than that. Risk is that the deal breaks, but I guess that's what the 13% spread ($190 buyout price / $168 current share price) may be implying. Any thoughts?

I bought calls this morning and am already out...the spread appears to be closing in the options market but the shares remain under valued....likely less risk there?