Note: The Skinny blog is written by Rick Smith, editor and co-founder of Local Tech Wire and business editor of

RALEIGH, N.C. – Wednesday is earnings report day for (NYSE: RHT), and the Hatters are expected to report a strong quarter for sales. However, profits will be down.

Those expectations led analyst Katherine Egbert at Jefferies & Company to “reiterate hold” on Red Hat shares in a report issued Tuesday. She also is projecting strong revenue growth in the new fiscal year.

“We have estimated y/y revenue growth of 12.9 percent for FY11,” Egbert wrote.

Egbert has some concerns about Red Hat, such as its stock trading at more than $30 a share and how that compares with earnings. She rates the stock as a “hold” with a value of $27.

However, in trading Wednesday morning, buyers drove RHT up nearly 3 percent, or 84 cents, to $31.01. The price peaked at $31.14 on the day before falling back to $30.90 in late afternoon trading.

“At this valuation,” Egbert wrote, “there seems little room for error” in projecting earnings guidance for fiscal 2011. Just what Chief Executive Officer Jim Whitehurst and Chief Financial Officer Charlie Peters have to save about coming revenues “is likely to be the focus” of the earnings call will analysts after quarterly financials are issued when the markets close at 4 p.m.

“Valuation is the key concern,” she added..

“We like Red Hat – the management team has executed very well and they have done a nice job taking share in a weak economic environment.

“Yet we feel they are at a slight disadvantage to competitors like VMware who can take
advantage of both an economic recovery and strong secular growth
in virtualization.

“Red Hat seems more like a play on the relatively mature trend of Unix to Linux migrations and recessionary growth in low end server purchases.”

Noting that Red Hat is trading at 18.4 times per earnings, she pointed out “there is little room for error.”

“Reiterate Hold and $27 price target.”

Analysts at First Call are expecting Red Hat to report a 16-cent profit per share on revenues of $193 million.

That profit margin is 6 cents less than a year ago, but revenues are predicted to increase from $166 million.

Remaining profitable without slashing headcount and expenses while also increasing revenue certainly set Red Hat apart from most companies, given the continuing global recession.

RHT’s price reflects that performance. Shares closed at $30.17, up 17 cents for the day, and increased another 30 cents in after-hours trading. Its 52-week high remains $31.76, a mark reached in December.

Its 52-week low is $14.43.

At least Red Hat shareholders have rebuilt some of their personal wealth, eh?

“We expect a pretty good quarter from Red Hat,” Jefferies said in her note.

Some highlights:

• “We expect solid cash flow” with server sales up 9.9 percent year-over-year

• “We expect on a $438k [foreign-exchange] related headwind” but strengthening of the U.S. dollar could reduce operating cash flow by $1.15 million.

However, in “valuation risks,” Egbert cited Oracle, which recently acquired Sun. “Risks include Oracle’s entry into the enterprise operating system market, flattish margins, opaquerevenue, and valuation that is based on difficult to predict cash flows,” she said/

“It remains unclear how Oracle’s recent purchase of Sun Microsystems might effect the server OS market, but we think it’s likely that Oracle will set pricing on Solaris at levels that make it attractive for customers not to switch.”

Jefferies rates Oracle stock as a buy.

What will the rating be on Red Hat after today?

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