how can a $6 stock be expensive?
Here is how from Barron's...
Bernstein Research hardware analyst Toni Sacconaghi this morning downgraded Sun Microsystems (SUNW) to Underperform from Market Perform, asserting that the company’s March results could prove disappointing, that it’s turnaround is not assured and that the stock is expensive.
“Given SUNW’s recent stock performance, we believe that investor expectations reflect a belief that SUNW will continue to beat consensus expectations, signaling that its recovery is much stronger than many believe,” he wrote in a research note this morning. “However, our channel checks suggest that SUNW’s FY Q3 [ended March] - especially in the U.S. - was weaker than prior quarters, especially high-end servers and storage.” Sacconaghi also writes that he has heard of higher-than-normal channel incentives and promotional activity, and that Sun suspended channel inventory reduction efforts.
Sacconaghi trimmed his revenue estimate for the June 2007 fiscal year to $3.33 billion from $3.4 billion, and EPS to 12 cents from 13 cents.
Sacconaghi also thinks that the stock is expensive. He notes that the shares have outperformed the market by over 10% in 2007 and over 40% since July, “reflecting investor enthusiasm and confidence about improving financials.” He asserts that the stock appears to be discounting operating margins of 11%-12%, despite consensus estimates of 2.6% margins this year, and the company’s stated goal of 10% by fiscal 2009. He notes that the stock trades at the same price/sales multiple as IBM, which has 15% operating margins and a similar growth rate; and that the stock trades at 2x Dell’s price/sales multiple, and a 30%-40% premium to HP.
Not least, he asserts that Sun’s goal of 10% operating margins “is not a slam dunk,” and asserts the company’s recent momentum in servers “may be difficult to sustain.” He notes that the company has completed over 90% of its planned 4,000 layoffs, and that further operating margin improvement will require improved gross margins, which he thinks “will be difficult to effect.”
Sacconaghi maintains a price target on the stock of $4.60. |
