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Tickers in this Article: RACK, DELL, AMZN, MSFT, YHOO, JAVA, HPQ
Despite a recent cut in guidance, Rackable Systems (Nasdaq:RACK) has no debt and is selling at nearly its value in cash, which should provide enough safety to ride out the coming downturn in the economy.

Rackable Systems manufactures servers and storage products for use in corporate data centers.

Strong Balance Sheet
Rackable Systems reported a cash balance of $190.7 million for the quarter ending June 28, 2008, or $6.48 per share. The company also has no debt.

Last week, Rackable Systems cut guidance for fiscal 2008 ending december 29, 2008. The new guidance is for revenue from $275-300 million, and a non-GAAP loss of 8-16 cents per share. Mark Barrenechea, president and CEO said, "the recent market downturn has been dramatic and has greatly impacted the timing of our customers' buying decisions. The swift decline of the economy caused a demonstrable slow down in corporate purchasing as we entered September."

This was a fairly large cut for the company, which in August was looking for revenue of $353-374 million. During the conference call, Barrenechea was more optimistic, and said, "there are a number of factors weighing in the economy, we are not seeing this [affecting] short term or long term demand for our data center solutions." Management saw no lengthening of the sales cycle during the quarter. (To learn more, read Conference Call Basics.)

Interestingly, the company forecast an ending cash and equivalents of $175-200 million for the end of the fiscal year. This would give it anywhere from $5.95-6.80 cash per share. Using a current price of around $7.15, an investor is paying almost nothing for the rest of Rackable Systems.

-
Low
Current
High
Ending Cash
$175M
$191M
$200M
Share Count
29,419,092
29,419,092
29,419,092
-
-
-
-
Cash Per Share
$5.95
$6.48
$6.80
Share Price
$7.51
$7.51
$7.51
Cash as %
of Market Value
79.2%
86.3%
90.5%
Data as of market close October 16, 2008
Some Problems
Rackable Systems does have significant dependence on a few major customers for business. In fiscal 2007, Microsoft (Nasdaq:MSFT), Yahoo (Nasdaq:YHOO) and Amazon (Nasdaq:AMZN) accounted for 64% of revenue. Although it can be worrisome to be so dependent on a few major customers because they can exert power over a supplier, all three of these customers are financially strong. Microsoft has almost no debt and $21 billion in cash, and Amazon has $2.4 billion in cash, or $1.45 billion if you subtract the company's debt. Even Yahoo, despite its well-publicized battles with large shareholders, has no debt and $3 billion in cash.

Rackable System also competes against some well-known and deep pocketed competitors, including Hewlett-Packard (NYSE:HPQ), Dell Computer (Nasdaq:DELL) and Sun Microsystems (Nasdaq:JAVA). All of these companies are much larger and have extensive products in both of Rackable's product lines.

Bottom Line
There could be a bargain opportunity here. Rackable System's excellent balance sheet and low valuation may protect it from further declines during the current recession.

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