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Netscout - mystery breakout

Many stocks just peek above their upper Bollinger Band. Then there are other stocks that explode above their upper Bollinger Band. We've got one the latter kind for you today.

Netscout Systems (NTCT) exhibited a powerful move on Friday and showed up this weekend on our list of Bollinger Band Breakouts. You can see that breakout clearly on the chart below:

A month ago the company announced Q1-2010 earnings and missed analyst expectations by a penny. The company retained some investor goodwill, however, by reaffirming forward guidance and reinstating plans for a stock buyback.

Background --

NetScout Systems, Inc. designs, develops, manufactures, markets, sells, and supports application and network performance management solutions worldwide. The company's primary product suite monitors, collects, and publishes information on the behavior of individual applications and services, such as voice over Internet protocol, streaming media, electronic trading, supply chain management, interactive smart phone applications, and customer relationship management; and the performance of the underlying network, such as routers, switches, and communication links, as well as the level of activity by end-users or subscribers.

The company recently acquired Network General and the integration seems to moving along well. The company has partnered with Cisco and HP.

The company is in a field that is attracting more attention: monitoring quality of service (QoS) for networks. It is also in the growing niche of monitoring application performance. An added benefit is that the level of detail provided by Netscout products enables customers to dig into problem areas and devise solutions.

Financially speaking, looking at the numbers on an annual basis there a pronounced growth trend in place. Looking at things on a quarterly basis, the company has experienced some weakness over the last two quarters (who hasn't during this downturn) but has managed to remain profitable. The chart below shows a snapshot of the income statement:

Explore more NTCT Data on Wikinvest

Unfortunately it doesn't have data for the most recent quarter. but the quarter-over-quarter decline was very modest so you can get the idea of the company's performance. Click on the "5Y" button to see the strong growth over the last two years.

Bottom line, we have here a company in a growing niche that has remained profitable during a time when many companies have seen negative results. The company is certainly doing better than one of its main competitors, Opnet.

After a 7% move on Friday, it is easy to assume the company is overbought. On a short term basis, there is probably room for a pullback but with a PEG of 0.88, a trailing PE of 19 and forward PE of 12, the company doesn't actually look especially overvalued.

So what drove Netscout's big move on Friday? I wish I knew. Was it an analyst upgrade? A new contract announcement? I couldn't find a thing searching the web this weekend. I wonder if we'll hear news of a buyout offer this week? IDC has written that further consolidation in the network performance management market can be expected. Indeed, the Network General acquisition was used as an example. So we'll just have to watch the news and see if Netscout shows up as the next Cisco acquistion.

Disclosure: no positions

Comments

Master Howto said…
Thanks for sharing this insight. I like to read your article along with its sharp analysis.

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