Brocade Communications Systems ( BRCD | Profile | Trade ) Strong Buy
Author: Glen Ingalls F01E: $0.28 F02E: $0.39 Price: $19.27
Quarter Looks Doable
While the current environment for servers and storage appears challenging overall, we believe that our $120 million and $0.05 estimates for Brocade Communications Systems' October quarter remain within reach.
The company?s longer-term fundamentals are strong and about to get stronger with new software and switch offerings on schedule for release in the second half of October.
The forthcoming new products promise to widen Brocade's lead relative to competitors in 2002 and 2003 and allow it to emerge from the economic slowdown as a more dominant company.
At $19 the stock is a bargain relative to 2002 and 2003 normalized earnings potential (32x and 15x multiples, respectively).
The stock has outperformed the market since Sept. 10, despite a profit warning from EMC.
We think that upside potential from here significantly outweighs the risk of further declines. We maintain our strong buy rating on BRCD shares.
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Sun Microsystems ( SUNW | Profile | Trade ) Buy
Author: Mark Specker F01E: $0.44 F02E: $0.19 Price: $8.69
StarCat Launch
Sun Microsystems held press events in New York and San Francisco yesterday to launch its high-end Unix StarCat systems. Sun Microsystems has shipped a small number of machines to date and expects to book revenue in November. StarCat's predecessor, the E10K, generated 17% of Sun Microsystems' revenues in F01.
Our discussions with a broad range of industry analysts suggest a close race between Sun Microsystems and IBM technically, for the full offering. Hewlett-Packard, however, has missed its window with Superdome. Given the merger and resultant uncertainty, we think that Hewlett-Packard will lose a chunk of its 30 points of Unix share to IBM and Sun Microsystems in the next 24-36 months.
We are more positive on Sun Microsystems as valuation has returned to more normal levels. C02 numbers still have macro risk as our C02 Unix market assumption looks for C00 revenue levels. Against this risk, however, we have increased conviction that Sun Microsystems can take more Unix share than the flat level modeled.
In what is still a very unsteady macro climate, our bias is to move to names with a large chunk of counter-cyclical revenue: services. Beyond this, we like corporate- and government-spending-biased names over consumer names.
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Micron Technology ( MU | Profile | Trade ) Buy
Author: Scott Randall F01E: $ F02E: $-0.54 Price: $21.24
Tough Environment
Micron posted a loss of $0.28, in-line with our estimates on a combination of lower revenues, slightly lower R&D expenditures and a higher than expected tax shield.
Reported results were a loss of $0.96 that included an aggressive inventory write-off of $466 million (equivalent to about $0.48) and a $191 million charge (equivalent to about $0.20) for the write-down of its equity investment in abandoned Interland (formerly Micron Electronics).
Revenues came in at $480 million, less than the $782 million that we were estimating, reflecting in part lower ASPs driven partly by higher participation in the spot market than we had estimated and by a lower contribution from SRAM and Flash. For the August quarter, Micron sold about 40% of its product into the spot market, higher than the typical 20% to 25% level. For the quarter, average ASPs declined by about 55% sequentially, or just under $2.
Sequentially, Micron grew bit shipments by about 30%, higher than the 18% that we had been modeling.
While Micron noted that it saw only a limited uptick in seasonal back-to-school demand, it is still looking for strong seasonal growth driven by a combination of price elasticity, increased box loading driven by XP and further share gains.
With Micron's stock having come down markedly, the company is approaching trough valuations on several metrics. Despite this, we believe that the combination of weak pricing and questionable PC demand could serve to hold the stock in check. Although we continue to be bullish on the long-term consolidation that we expect to see in the DRAM industry, we continue to believe favorable evidence of this consolidation may not become apparent until the second half of calendar 2002. |
