Trading Ideas: An Extreme (EXTR) Small Cap Value

Extreme Networks, Inc. (EXTR) provides network infrastructure equipment for corporate, government, education and health care enterprises, and metropolitan telecommunications service providers. On August 3rd, Barron’s Eric Savitz wrote that EXTR looks “crazy” cheap and we agree that it’s a solid small cap value play.

The networking company recently reported earnings and sales that were better than Wall Street expected. For its 4th quarter, EXTR posted revenues of $98.3 million versus an expected $85.3 million. Extreme earned 3 cents a share, a penny more than the consensus of 2 cents.

The stock currently trades at just 12x next year’s expected earnings. That’s less than half of its projected bottom line growth rate of 27%. EXTR is valued at just 1.1 times sales with a cash position of $225.7 million, 58% of the company’s market cap of $389 million.

Management must see the value in their share price as they plan on using some of that cash to repurchase $100 million of its stock through a modified Dutch auction tender offer. EXTR is offering to buy the shares from stockholders between $3.30 and $3.70 per share. At the current price, that represents about 25% of the shares outstanding.

With no debt and a lot of cash relative to its market value, Extreme can be a possible takeover target. An acquisition would basically be self-financed using EXTR’s cash. In our opinion, that’s probably one of the reasons management decided to buy back shares, a defensive move to make it more expensive to purchase.

If we have made The Correct Call and management continues to execute, we believe EXTR could return more than 50% to investors in the next 6-to-12 months.

Suggested Stop: $2.93

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