Super Micro Computer: Zacks’ Bull of the Day Play

Earnings estimates have been soaring for Super Micro Computer (SMCISnapshot Report) after the company delivered exceptional fiscal 2015 second quarter results. It is a Zacks Rank #1 (Strong Buy) stock.

Not only did Super Micro Computer blow away analysts’ expectations for earnings, revenue came in well above expectations too. And management also provided a bullish outlook for next quarter, which prompted analysts to raise their estimates for both this year and next.

Super Micro Computer, Inc. develops and provides end-to-end computing solutions to various markets. Its solutions range from complete server, storage, blade and workstations to full racks, networking devices, server management software and technology support and services.

Second Quarter Results

Super Micro Computer delivered stellar results for its fiscal 2015 second quarter on January 20. Earnings per share came in at $0.61, crushing the Zacks Consensus Estimate by 18 cents. It was more than double EPS in the same quarter last year.

Net sales surged 41% year-over-year to $503.0 million, well above the consensus of $468.0 million. The ‘Server Systems’ segment, which represented 60% of total sales, saw top-line growth of 74%. This was primarily due to an increase in sales of complete server systems based on Intel’s DP Haswell processor, which was launched in September 2014. Sales in the ‘Subsystems & Accessories’ segment, which accounted for the other 40%, rose 10%.

Geographically, sales were strongest in the United States, which experienced 60% growth year-over-year. The U.S. accounted for 57% of total sales in the quarter. Sales in Europe rose 8% while Asia fell 4%.

The gross margin expanded from 15.5% to 16.8% of sales. Meanwhile, operating income surged 112% as the operating margin expanded from 5.7% to 8.5% of sales. This was due in large part to the company leveraging its general and administrative expenses.

Estimates Rising

On top of solid Q2 results, management issued bullish guidance for Q3. This prompted analysts to revise their estimates significantly higher for both fiscal 2015 and 2016, sending the stock to a Zacks Rank #1 (Strong Buy).

The Zacks Consensus Estimate for 2015 is now $1.99, up from $1.70 before the Q2 report. The 2016 consensus is currently $2.21, up from $1.84 over the same period.

Valuation

Shares of Super Micro Computer trade around 18x 12-month forward earnings. That’s a premium to its historical median of 14x. And its enterprise value to operating cash flow multiple of 18 is also above its historical median of 14. But these valuation multiples are certainly not unreasonable given the strong growth projections.

The Bottom Line

With stellar top-line growth, expanding profit margins, rising earnings estimates and reasonable valuation, Super Micro Computer offers investors attractive upside potential.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

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