Palo Alto: Under Appreciated Free Cash Creates Opportunity

Palo Alto Networks Inc PANW shares have lost 8 percent since March 22. Morgan Stanley’s Keith Weiss maintained an Overweight rating for the company, while raising the price target from $171 to $185. The analyst mentioned that a 40 percent 3-year FCF CAGR made Palo Alto a Top Pick among Security stocks.

The estimates have been raised “based on greater conviction in the durability of top-line growth and a clearer view of the free cash flow ramp coming out of the recent Analyst Day,” analyst Keith Weiss wrote.

Shares Underperform

With Palo Alto’s shares down 10 percent over the past month, the company had underperformed the broader market due to concerns over the durability of its top-line growth, the quality of its FCF generation and a general slowdown in security spending, Weiss noted. Palo Alto’s shares are now trading significantly below the peer group as well as their historical average.

FCF Generation

The analyst believes Palo Alto’s growth would be “more durable than feared,” and expects the company to generate FCF margins of 40-45 percent. This would result in an FCF CAGR of 43 percent through FY18, with FCF reaching $1.8 billion by 2021.

“Palo Alto Networks has a number of top line drivers which should drive a more sustainable growth profile versus current investor expectations, in our view,” Weiss wrote.