Sandvine has strong double-digit upside, says M Partners

Lower R&D costs and improving gross margins are setting Sandvine (Sandvine Stock Quote, Chart, News: TSX:SVC) up for a solid fourth quarter says M Partners analyst Manish Grigo.

In a research update to clients this morning, Grigo maintained his “Buy” rating and one-year target of $4.50 on Sandvine, implying a return of 47.1% at the time of publication.

Grigo notes that gross margins have been steadily improving at the Waterloo-based company, from about 74% in fiscal 2013 to an expected 77% in fiscal 2014. The analyst thinks several recent wins will support margin growth and bode well for the company’s business, going forward.

“Over the last two months SVC has announced over $20MM in orders; these wins support our thesis that there is secular trend towards adoption of real time network management solutions. Recent wins, albeit with smaller operators, for their virtualization products demonstrate the company’s ability to move to the next generation of network management solutions,” said Grigo.

Grigo, who expects Sandvine will report its fourth quarter and fiscal 2014 results in the second week of January, says his revenue estimate for the quarter remains unchanged at $32-million, but notes that he is raising his gross margin estimate from 73.1% to 75.5%. The analyst says investors should take advantage of recent weakness in the company’s share price, a development he sees as a buying opportunity.