(By Kevin Donovan) They can beat grand masters of chess at their own game and governments need them as much as they need taxpayers. No, they don't wear capes or leotards but they do have super powers, and Cray Inc. is their leader.
Supercomputer maker Cray vaulted sharply higher in recent months as the result of two events – a strategic sale of assets to Intel and the announcement of first-quarter results that blew the doors off analysts' estimates. We believe the shares, up 78% year to date, could have further to run.
THE HIGH PERFORMANCE COMPUTING MARKET
Revenues in the High Performance Computing (HPC) technical server market are expected to expand at a compound annual growth rate of 7.3% to 2016, according to forecasting firm International Data Corp (IDC). The biggest slice of that growth is expected to come from supercomputers.
"HPC technical servers, especially Supercomputers, have been closely linked not only to scientific advances but also to industrial innovation and economic competitiveness," Earl Joseph, program vice president for Technical Computing at IDC, said in a press release.
He added: "Nations and regions across the world are increasing their investments in supercomputing even in today's challenging economic conditions. We expect the global race for HPC leadership in the petascale-exascale era to continue heating up during this decade."
Cray began its run in late April with the announcement it was selling assets to Intel for $140 million in cash, but retaining certain rights to use the transferred assets and intellectual property in Cray products. The move not only dramatically shored up the balance sheet, but opened the door for a potentially lucrative relationship with Intel, said Peter Ungaro, president and CEO of Cray. The move, he said, positions the company "to further penetrate the HPC market and expand on our industry-leading technologies in support of our Adaptive Supercomputing vision."
The market was impressed with the move and then became more enamored when Cray reported a blowout first quarter. It logged revenue of $112.3 million compared with $39.9 million in the prior year period and analysts' mean estimate of $99 million. Net income for the quarter was $5.0 million, or $0.13 per share, compared with a net loss of $1.5 million, or ($0.04) per share, in the first quarter of 2011 and analysts' mean estimate of a $0.03 per share profit. Cray also boosted 2012 guidance to $430-450 million in revenue from $340-360 million previously.
On Friday, Cray announced it had been awarded a $16 million contract by the Department of Defense High Performance Computing Modernization Program to upgrade the program's three existing Cray XE6 supercomputers. Cray will also deliver a new Cray XE6m supercomputer to the Naval Research Laboratory in Monterey, Calif., for use by the organization's Marine Meteorology Division.
Already in the pipeline is a $97 million contract awarded last year to upgrade the Cray XT5 supercomputer nicknamed "Jaguar" at the Department of Energy's Oak Ridge National Laboratory ) to a new Cray XK6 supercomputer, nicknamed "Titan." The Titan will have a peak performance between 10 and 20 petaflops (quadrillion mathematical calculations per second).
Petaflops aside, the company has yet to build a supercomputer that can predict its share price, so we'll take on the task. Multiplying the trailing 12 months price-to-sales ratio of 1.39 by the $440 million midpoint of revenue guidance for 2012 and dividing by the 37 million shares outstanding, we derive a target of $16.50, some 43% above Friday's closing price of $11.54. We think this target is conservative, given the opportunities for growth in HPC and Cray's leading position in supercomputers.