Sun Shines Through Doubts
by Elyssa Jaffe
4:19:00 PM January 18, 2001 GMT
Despite lingering concerns from on Wall Street, networking giant Sun Microsystems [SUNW: Nasdaq] reported 2Q earnings that jumped 60% on revenue growth of 44%. In response, we are changing our rating on Sun Microsystems to a Buy from a Sell.
Sun produces high-end computers, which run the networks of other companies. The company continues to flourish despite the setbacks of so many other technology companies. Yet Sun remains apart from the laggards because its livelihood is not associated with the technology niche suffering the greatest -- consumer personal computers.
Revenues for the 2Q were $5.1bn. Order flow was strong as well, growing 32% to $4.9bn in the period. Drivers behind the growth include continued customer acceptance of its products, service and support. In fact, during the quarter, Sun gained more market share than in previous quarters.
Net income grew 56% to $552m, up 56% from last year’s $354m. Earnings per share of $0.16 were in-line with Wall Street’s expectations.
New systems rolled out in heavy volume during the quarter. And new product introductions, including a line of server appliance products, helped stimulate demand.
Shares of Sun have been under pressure due to economic weakness and decreasing corporate budgets for corporate information technology. Despite doubt, Sun continues to reiterate that demand across all product lines and geographies continues to be robust, and as a result, sales should jump nearly 50% year-over-year.
Analysts have sounded calls of caution regarding the company’s ability to continue growing at the same rate as it has over the last few years. Sun has traditionally been one of the fastest growing major technology companies.
Earlier today Sun announced that its partnership with America Online [AOL: NYSE] has led the online service to purchase products and services worth $400m, a significant addition to the $500m worth of equipment it agreed to buy in 1998. AOL now uses more than 4,000 Sun servers.
With key acquisitions in the mix and the closing of new deals, coupled with strong global diversification, Sun should be able to weather troubles with high-end hardware that have affected others, most notably Hewlett-Packard [HWP: NYSE]. We now recommend Sun shares, especially with the stock trading at a reasonable 31.8x June 2002 earnings estimates, a 36% discount to sales growth.
Market Timing
From the Technical Desk
On Dec. 15, we said: "Technically, shorter-term, Sun Microsystems [SUNW: Nasdaq] is oversold but does not appear to have found a bottom. Support $28, but the trend is down and the stock still looks to erode to the $25-1/2 area over the next two to four weeks. Resistance in the $32/$34 area should cap minor rallies. "
Sun Microsystems hit our target of $25-1/2 in late December. It has since rebounded and it looks likely to rise to $40 in two to four weeks. It is trading at $34-9/16 currently.
Risk Tolerance: ***
(* Low risk, ***** High risk)
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