Rackspace (RAX) Rumored to Go Private, Shares Up 7%

by Ryan Fitzwater, Director of Research, The Oxford Club

Shares of Rackspace Hosting Inc. (NYSE: RAX) are up big today on news that the company is considering taking itself private. TechCrunch reported yesterday that management is talking to a private equity firm to fund the deal and may make an announcement this week.

Rackspace, a cloud service provider, jumped more than 7% on the news.

TechCrunch, who cited a source from inside the company, states that this comes amid at least three acquisition bids, including bids from IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ). Rackspace has yet to confirm this information.

Rackspace has a current market cap of $4.8 billion, and our sources say that an acquisition could catch upward of $6.1 billion.

If the source is correct that Rackspace might take itself private, that is good news for shareholders. In general, private equities firms pay at least a 20% to 40% premium over the current stock price to take public companies private. These talks also provide incentive for more takeover offers from competitors at an even higher price.

Aside from positive news on talks of going private and takeover bids, how does Rackspace stack up from a fundamental standpoint?

Good question. Let’s see how the company performs on the Investment U Fundamental Factor Test:

Earnings-per-Share (EPS) Growth:  Last quarter, Rackspace saw a 10% drop in earnings. One of the reasons the company has been struggling is due to new competition and a constant battle with industry giants like Google (Nasdaq: GOOG) and Amazon.com (Nasdaq: AMZN). Increased competition coupled with shrinking profits probably plays a big part in why Rackspace would consider being acquired.


Price-to-Earnings (P/E):  Rackspace’s current P/E is 57.20, a few points above the industry average of 52.41. It misses on this metric as well.


Debt-to-Equity For debt-to-equity, Rackspace crushed it. It has a debt-to-equity ratio of 6.45%, well below the industry average that clocks in at a massive 306.47%.


Free Cash Flow per Share Growth :  In its most recent quarter, Rackspace saw a 571% increase in FCF per share. It is definitely taking the prize home on this metric.


Profit Margins Rackspace is substantially outperforming the competition here. It has profit margins topping 6%, while the industry average is 3.84%.


Return on Equity : Rackspace is barely underperforming the competition here, but we have to stick to our grading metrics. The company has an ROE of 8.58%, a thin slice below the industry average of 8.64%.

*Why did we look at these specific metrics? Find out more here.


Fundamental Factor Test Score

C: Hold (Hits just three key metrics)


Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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