SolarWinds (NYSE:SWI) Price Target Increased by Jefferies

On Wednesday, Jefferies raised it’s price target for SolarWinds (NYSE:SWI) to $57 from $51.  In a research note issued by Aaron Schwartz, he indicated that the company’s cash flow potential remains underappreciated.  The stock continues to be a stock favorite at Jefferies.

Highlights of the note included:

20% license growth could serve as a baseline. Stable ASPs with recent levels, and productivity from 2013 sales capacity expansion should result in license growth in the 20% range, 4% ahead of current estimates. And we believe the cross-sale efforts—which have historically proven to be efficiently incremental to growth—and additional sales capacity increases will act as further upside influences to license growth.

Cash flow potential is underappreciated. Higher reinvestment plans are already considered in consensus estimates and when looking forward 1) Street models assume hardly any margin recovery with 42.5% forecasted CY15 margins; 2) revenue estimates consider little to no incremental impact from these reinvestments; and 3) the company has a history of margin outperformance with an average of 4 points of upside since 2010. With no structural changes in the business, we think margins could return to historical levels in late CY15, which could bring $235-255mn in FCF, 24% above consensus, which equates to about $3.10/share.

Upward estimate revisions and multiple expansion. When considering a reasonable margin recovery in CY15 but still conservatively below past 50%-plus levels (we model 45.9% vs. 42.5% consensus); and modest multiple expansion to still acceptable levels that equate to a PEG of 1x on cash flow growth, shares could appreciate to the $55-$60 range. Weremain positive on SWI, and continue to recommend the stock as a Jefferies Franchise Pick.

SolarWinds Inc(NYSE:SWI)’s stock on March 5, 2014 closed down 1.15% finishing with the closing price of $45.50. Its fifty two week range is $31.94 – 61.52. The company’s total market capitalization stands at $3.42 billion. The total volume in the last trading session reached 1.88 million compared to it’s average volume of around 1.09m.

SolarWinds (NYSE:SWI) has 75.13 million outstanding shares.

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