RALEIGH, N.C. — Spiked eggnog didn’t flow Thursday at Red Hat’s headquarters, but there was some reason to celebrate. Stock in the Linux software developer and services provider seems to have bottomed out.

Katherine Egbert at Jefferies & Co. issued a report late Wednesday that upgraded Red Hat to a “buy” from "hold." Egbert also reported that Red Hat may have a deal with Cisco Systems in the works for server technology. If so, that could mean big news for Red Hat’s Enterprise Server product, the company’s bread-and-butter.

Egbert’s upgrade sparked a rally in Red Hat (NYSE: RHT) shares. Prices climbed some 6 percent, or more than 60 cents, to reach back above the $11 level before closing the day at $10.93.

The rally came despite an IBM report, also on Thursday, that . Problem for Red Hat? Well, IBM chose Ubuntu Linux from Canonical and Virtual Bridges’ desktop virtualization software. Red Hat was shut out even though it is making a major play in virtualization and does invest in Fedora for the desktop.

However, the move didn’t concern Egbert. She told The Skinny: “Red Hat pulled out of the desktop market last year. I think that they think there’s not much opportunity (read: money) in it for them,” she said. (An IBM exec involved in the project declined immediate comment. Red Hat insisted to The Skinny that its relationship with IBM remains strong.)

Thursday’s share price is still less than half the 52-week high of $24.84 that RHT reached in June as new Chief Executive Officer Jim Whitehurst hit his six-month anniversary. But like the rest of the tech sector, RHT plummeted in November to a 52-week low of $7.39 on Nov. 21.

So what is sparking the rebound?

Egbert, who criticized the Hatters in September after what she viewed as a “mixed hat” third-quarter earnings report and said they faced the prospect of tough sailing, that she sees several positive developments.

“OK November,” Egbert headlined her report, referring to Red Hat sales information she had gathered. “Upgrade to buy.”

Why the change?

“Red Hat dominates its niche, has 100 percent recurring revenue and $3.90 in net cash/share,” she wrote. “Our checks indicate in-line November results were led by solid Jboss sales. Upcoming new partnership with Cisco could provide an additional boost. Raise EPS to exclude amortization and lower revenue due to FX. Upgrade to Buy.”

In other words, earnings per share look good, though foreign exchange might hurt,

“Checks indicate steady demand for the core RHEL products (AP, RHN, etc.), while JBoss sales continue to outperform,” she added.

Then came some words the Hatters must have loved, given their bitter rivalry with Oracle plus the bottom-line appeal of Linux vs. proprietary solutions.

“It seems like Red Hat is picking up some share in middleware due to BEA/Oracle (ORCL, $16.13, Buy) dislocation and because open-source solutions become relatively more attractive as budgets tighten,” she said.

And then came the clincher for the good news:

“Cisco relationship on tap,” she said. “Industry sources indicate that Cisco’s (CSCO, $16.01, Buy) upcoming line of blade servers is likely to offer RHEL as an option, perhaps even as the default OS. The KVM (non-bare metal) virtualization features in RHEL would allow any type of virtualized container to run on the Cisco blades.”

So what’s ahead for 2009? Egbert likes what she sees in many areas.

“Upgrade to Buy,” she concluded. “With 100 percent recurring revenue including 80 percent off the balance sheet in any given quarter, increasing JBoss sales, and low-cost leadership, Red Hat is well-positioned to buffer the ’09 spending storm. Additional revenue from a deal with Cisco would provide upside to our current estimates. The company has $3.90 in net cash per share, and on a cash-flow basis, the shares are yielding about 16 percent.”

Red Hat announces fourth-quarter earnings on Dec. 22. Based on Egbert’s reporting, the news could be good – just in time for Christmas.