Data networking security equipment vendor Blue Coat Systems (BCSI) received a Buy rating out of the shoot today at Collins Stewart as analyst Gabe Lowy initiated coverage with a $29 price target. Lowy thinks the company can continue a streak of four quarters beating estimates in a row, and he thinks the roughly $850 million worth of shares in the company are cheap after a 60% decline from October.

Blue Coat sells hardware devices with specialized software that stands in front of corporate servers, as a kind-of middleman between corporate applications and remote users connecting to those apps over the Internet. Although Blue Coat has competition from other promising companies, including Riverbed Networks (RVBD), Juniper Networks (JNPR), and Cisco Systems (CSCO) and a host of others in different segments of the market, the company has a certain advantage by the way that its software improves that application performance and also provides what’s called a “proxy” to protect the network. Lowy estimates Blue Coat is third in line in market share behind Cisco at number one and Riverbed in second place.

Lowy expects the company will see operating margins improve to almost 20% by the April-ending fiscal year of 2010, up from less than 10% last year. That’s because Blue Coat bought a competitor, Netcache, in 2006, and he thinks the company will increasingly be able to sell the combined mix of products to the combined customer base, leading to slower growth in R&D relative to sales growth. His estimates for next fiscal year (April ‘09) are in line with the consensus at $402 million in sales and $1.40 in earnings per share.

People are on the hunt for good buys in small-cap stocks with the turn-around in the market today, is my feeling. Blue Coat stock today is up almost 9% at $24.57.