) to outperform from from neutral.
Analyst Steven M. Ashley says fourth-quarter results are as expected, with bookings remaining solid in the face of Solaris 10x86 launch. He expects EBIT margins to bottom out in the first quarter.
He says revenues are expected to grow 40% year-over-year in fiscal 2006 (ending February) and Red Hat trades at just 16 times expected fiscal 2006 free cash flow. He notes given strong underlying growth in deferred revenue, he values Red Hat based on free cash flow, which was $107 million in fiscal 2005 and is expected to increase 40% to $150 million in fiscal 2006.
Ashley expects Red Hat to shift to pro forma earnings per share after the second quarter, which could modestly increase estimates. He raises his $14 target to $15.