Dear Lynn: I dont recall this being posted, dont know how we missed it. JDN
Salomon Smith Barney ~ July 21, 2000
Sun Microsystems, Inc. (SUNW)#
SUNW: Upgrade to 1M. 1M (Buy, Medium Risk)
Mkt Cap: $159,575.9 mil.
July 20, 2000 SUMMARY
* We have never seen anything like the last two quarters.
SERVER & We are revising our cautious position on the Ultra Sparc III
ENTERPRISE product transition as overall demand and the backlog is
HARDWARE strong enough to offset the normal product transition
John B. Jones challenges.
Jr. * Sun has become a core holding in our minds. We are
increasing our rating to Buy from Outperform and are raising
our target to $135 from $90.
Craig A. Ellis * Additionally, we are increasing our CFY01E EPS to $1.35
from $1.20 and are establishing a CFY02 EPS estimate of
$1.70.
FUNDAMENTALS
P/E (6/00A) 92.1x
P/E (6/01E) 69.6x
TEV/EBITDA (6/00A) 52.7x
TEV/EBITDA (6/01E) 40.4x
Book Value/Share (6/00A) $4.30
Price/Book Value 21.8x
Dividend/Yield (6/00A) $0.00/0.0%
Revenue (6/00A) $15,721.0 mil.
Proj. Long-Term EPS Growth 21%
ROE (6/00A) 30.5%
Long-Term Debt to Capital(a) 22.2%
SUNW is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (7/19/00) $93.94 Current Rating 1M
52-Week Range $105.00-$33.59 Prior Rating 2M
Shares Outstanding(a) 1,698.7 mil. Current Target Price $135.00
Convertible No Previous Target Price $90.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
6/99A Actual $0.12A $0.17A $0.18A $0.24A $0.71A
6/00A Current $0.16A $0.21A $0.26A $0.39A $1.02A
Previous $0.16A $0.21A $0.26A $0.32E $0.95E
6/01E Current $0.29E $0.33E $0.32E $0.41E $1.35E
Previous $0.22E $0.28E $0.31E $0.39E $1.20E
6/02E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 6/00A $0.96; 6/01E $1.21; 6/02E NA
Calendar Year EPS: 12/99A $0.79; 12/00A $1.27; 12/01E $1.41; 12/02E NA
OPINION
Today Sun reported a blow-out quarter. Sun is clearly the category leader in
the broad UNIX-centric Internet infrastructure market which is becoming
broader every quarter. Given the demand drivers in this market and the
catch-up required outside the U.S. simply to achieve this country's early
stages of progress, we are reluctant to predict that Sun's growth will
diminish any time soon.
Our recent cautious stance on Sun was due to factors unrelated to our outlook
for robust e-business related demand. First, we expected a customary but
modest production efficiency deceleration with the Ultra Sparc III product
transition. Additionally, we thought that HP's and IBM's increasingly
competitive UNIX offerings would take some share or at least produce some
noticeable pricing pressure in the marketplace. However, we were clearly too
cautious. We do not deduce that the HP and IBM offerings are not selling
well since sales activity clearly suggests otherwise. Rather, we believe
that overall demand is simply much greater than we or anyone else thought.
INVESTMENT THESIS
We expect continued success from Sun in the UNIX market. Despite a very rich
valuation, its leadership position in market segments that are benefiting
from unprecedented demand suggest that 30% revenue and profit growth are
reasonable in the foreseeable future.
We attribute Sun's UNIX success to its: early position in the
ARPANET/Internet, significant installed base, large number of independent
software vendor packages, extensive network of third-party resellers, and its
world class marketing and distribution team.
Further, Sun has effectively marketed to the most robust growth segment of
the last two years, dot-com and ISP companies. For example, Sun has systems
installed at 12 of the top 14 ISP's. Further, Sun's No. 1 or No. 2 market
share in most UNIX categories give it an inside track with Fortune 1000
companies that are implementing sourcing initiatives. These programs are
designed to minimize support costs and companies with an installed based are
naturally advantaged in the bake-off.
Favorable Internet usage trends outside of the U.S. also augur well for Sun.
Europe is 3-4 years behind the U.S. in embracing the Internet and its usage
is expected to triple from 30 million people recently to 100 million in the
next three to four years. Asia/Pacific penetration lags that of Europe.
We believe storage, software, and services are essentially an "attachment"
story for Sun. For example, we believe "Purple", the company's new storage
solution, will be marketed aggressively as the optimal storage companion for
Sun's servers. While we believe EMC's storage products are superior to that
of Sun (especially at the enterprise level), and that Sun's Services business
is a few notches below that of IBM, continued good server attach rates should
mean revenue growth of 25% or above for the next two to three years.
While it would be reasonable to conclude that these favorable factors would
at least partially offset by increasingly tough UNIX competition from a
retooled HP sales force and a reinvigorated IBM UNIX box and the sharp focus
we believe that IBM, HP and CPQ have on taking Sun business it apparently has
not unfavorably impacted growth or margins.
Overall, we expect Sun's UNIX sales momentum to be maintained, and forecast
mid to high 30s server revenue growth next year.
COMPANY DESCRIPTION
Sun Microsystems supplies UNIX enterprise computing systems and employs
34,000 people worldwide. The company's primary segments are Hardware and
Services.
Within Hardware, the company's products include UNIX servers and desktop
systems, storage subsystems, Java and Solaris system software, and
Microelectronics. Sun's Services business include system support, IT
consulting, system integration network management and education and training.
Sun's products are used for many commercial and technical applications in
various industries throughout the world. Sun is a Midrange and Entry level
server revenue market share leader worldwide.
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