On Wednesday, Jefferies increased the price target for Rackspace Technology Inc . (NASDAQ:RXT) to $137.00, up from the previous $120.00, while maintaining a Hold rating on the stock. This adjustment follows a strong third quarter showing by Raytheon (NYSE:RTN) Defense, which contributed to a $0.10 rise in the estimated earnings per share (EPS) for 2024.
The company has also revised its EPS guidance for 2024 upwards by $0.14 at the midpoint. This revision is attributed to a boost in the EBIT of Pratt and Raytheon segments by $0.08, despite a $0.05 decrease from the Collins segment. Additionally, Below the Line (BTL) items are expected to add $0.09 to the 2024 EPS, while the free cash flow (FCF) forecast remains unchanged at $4.7 billion.
Jefferies did not reaffirm the 2025 FCF target of $7.5 billion, instead estimating a lower figure of $6.2 billion, which would result in a yield of 3.7%. This is below the average peer yield of 4.4%. According to the sum-of-the-parts (SOTP) valuation, Rackspace Technology is now valued at $137 based on average peer multiples, with Pratt's value calculated at net present value (NPV).
In other recent news, Rackspace Technology outperformed its second-quarter earnings expectations, demonstrating robust revenue, profit, and earnings per share. This success was partly driven by a strategic shift towards hybrid cloud and AI solutions, with a focus on regulated industries such as healthcare and finance. Despite a 3% sequential decrease in Private Cloud revenue, the company's Public Cloud segment grew by 1%.
Rackspace Technology is also investing in AI capabilities and expects an increase in digital transformation spending. The company repurchased $68 million of debt and anticipates generating positive cash flow for the rest of the year.
BMO Capital maintained its Market Perform rating for Rackspace Technology, despite the company's recent performance exceeding guidance. The firm recognizes Rackspace's positive momentum, particularly in the core professional services segment, but believes the company is still navigating through a recovery process to achieve substantial profit improvements.
InvestingPro Insights
Recent InvestingPro data provides additional context to Rackspace Technology's financial situation. Despite the optimistic price target increase from Jefferies, the company faces some challenges. Rackspace's market cap stands at $571.86 million, with a negative P/E ratio of -1.83 for the last twelve months as of Q2 2024, indicating current unprofitability.
InvestingPro Tips highlight that analysts anticipate a sales decline in the current year, which aligns with the reported revenue growth of -8.18% over the last twelve months. This trend may explain why Jefferies maintains a Hold rating despite raising the price target.
On a positive note, one InvestingPro Tip reveals that 5 analysts have revised their earnings upwards for the upcoming period, suggesting potential improvement in future performance. Additionally, the stock has shown a strong price performance, with a 107.38% total return over the past year and a 47.09% return over the last six months.
For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for Rackspace Technology, providing a deeper understanding of the company's financial health and market position.
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