IsraelNewsletter’s Aaron Katsman had a GREAT call last month on not puking Radware (RDWR) right before it made Morningstar’s Three Small-Cap Stocks for a Slugger’s Portfolio. Since he’d held it, Radware has named a new executive Chairman, gone up almost 14%, and received a CIBC Oppenheimer upgrade.

Is this just good decision making or me giving our star portfolio manager some much-needed love?

I think it’s the former — I’d like to posit that Aaron’s original thesis for owning it was correct — that things may have started to really turn around at the consummate “turn-around” story: Radware.

First, let’s air the dirty laundry:

Radware has missed street estimates 5 quarters in a row. To be blunt, management hasn’t given the street a lot to work with.

That said, they’ve been working on restructuring their US sales effort and we at IsraelNewsletter, in addition to CIBC Oppenheimer, cite this strengthening of their sales efforts and the gaining traction of their products as a reason to revisit this play.

Over the past year, Radware has eliminated its Israel-based sales team and has bolstered their US efforts with senior executives from ATT (T) and F5 (FFIV).

CIBC Oppenheimer cites:

“On the product front, Radware’s Application Switch 4 (AS4) and Application
Switch 5 (AS5) platforms continue to perform well. Successful traction of the
AS4 and AS5 platforms is critical, as they allow the company to
participate in key growth markets (large data centers, carriers), which
should help support upside longer term.”

On a valuation basis, we like the metrics — it’s cheap. The main thing we’ve struggled with (along with the Street) was figuring out whether Radware was cheap for a reason.

CIBC puts a 2.0x EV/2008 sales multiple on RDWR (a discount to the median 3.2x
multiple for Radware’s peers).

From the CIBC upgrade, we also like:

• Cash per share is $8.15, or roughly 60% of RDWR’s market value.
• Discounting the effect of its recent M&A activity, the company has remained profitable. As a result, we see the core business as a profitable one.
• With a strong install base and decent market share in the high growth Layer4-7 application switch market, Radware could be an attractive acquisition target, in our opinion.

So, it seems Katsman was prescient in his RDWR long and the sales restructuring is beginning to take root. Both he and Radware deserve the love.

Disclosure: Author’s fund is long RDWR as of 6/10/07.

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