Sandvine upgraded to a BUY by M Partners analyst Shuttleworth

M Partners analyst Ron Shuttleworth says Sandvine’s (Sandvine Stock Quote, Chart, News: TSX:SVC) Q2 numbers fell short of his expectations, but he thinks the outlook for the company is better than it has been in some time.

Yesterday, Sandvine reported a Q2 in which it earned (U.S.) $892,000 on revenue of $23.5-million in the quarter, following up on a Q1 in which it earned $1.7-million on revenue of $25-million.

Shuttleworth says Sandvine’s revenue, which fell below the company’s own internal expectations, also fell short of his. He thought the company’s topline would come in a $25-million, slightly below consensus, which was $25.3-million.

But the M Partners’ analyst says Sandvine’s channel strategy has grown stronger and is finally beginning to create earnings leverage. He now believes the company’s expense ratio will fall to approximately 60% from 62% for the second half of fiscal 2013, a reduction in expenses of about $3-million. This, along with increased revenue means Shuttleworth’s EBITDA forecast for 2013 has been bumped from $12.8-million to $19.8-million. The result is an upgrade; in a research report to clients this morning, Shuttleworth raised his one-year target on Sandvine to $2.40, up sixty cents from his previous $1.80 target. He has upgraded the stock from HOLD to BUY.

Shuttleworth says that because there is limited recurring revenue in Sandvine’s business model, the company is especially sensitive to macro-economic conditions. But this factor may now be working in Sandvine’s favour, as Europe, Middle East and African may now begin to allocate a larger part of their budgets to the company’s services, although he cautions that a flare-up in the Euro credit crisis could derail said spending.

At press time, shares of Sandvine were up 2.1% to $1.99.