Merrill Lynch has initiated coverage on Red Hat at “neutral,” saying the outlook for the provider of Linux and open-source technology is positive.

The firm said Raleigh-based Red Hat is “poised for growth as Linux continues to gain share at the expense of proprietary Unix solutions.”

Merrill Lynch said the enterprise Linux market can reach $529 million by 2007 and added that the release of Red Hat Enterprise Linux 3 is a catalyst for increased subscribers and the company’s top market position.

Red Hat is demonstrating “significant improvement in operating margins,” which could expand from their current low single-digit level to “over 10% in fiscal 2005,” the New York-based firm said.

Shares of Red Hat (Nasdaq: RHAT) were down 17 cents for the day, closing at $13.29.

Red Hat: