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Technology Stocks : All About Sun Microsystems -- Ignore unavailable to you. Want to Upgrade?

To: QwikSand who wrote (39316)	12/16/2000 7:33:34 AM
From: John Carragher	Read Replies (3) \| Respond to of 64865

today's barrons Hazy Sun After three bright years, Sun Microsystems slips behind a cloud. Time for a closer look? Review \| Preview Follow-Up: Pure Play \| Follow-Up: Energized Sun Microsystems, long a stalwart among tech stocks, caved badly last week, its shares falling nearly 25%, to around 30 from 39. And that was after a 10% drop the previous Friday on rumors of revenue recognition and other accounting irregularities that were hotly denied by the company. The sharp price decline is especially dispiriting, given that the company's stock had heretofore weathered the technology bear market so handily. In fact, the stock hit an all-time high of 64.63 in early September and held above 50 during much of the November swoon. But now Sun, still trading at a price/earnings ratio above 50, has been caught in the same vicious undertow as many of its peers. All the same, Sun has been a spectacular performer since Barron's sounded a bullish note in a cover story three years ago ("Rising Sun," January 5, 1998). The stock was then trading at around 6 on a split-adjusted basis, and investors worried about a heavy assault by Microsoft for domination of the network computing software market. But we thought Sun's prospects looked bright. For one thing, the company boasted an enviable position in network computing by virtue of its strength in servers and data-storage devices and its home-cooked Unix operating software systems for enterprise computing. To get a fresh read on the Sun situation, we checked in with Salomon Smith Barney's John B. Jones, one of the analysts who assisted us with that prescient call. For starters, Jones says the rumors of accounting irregularities are "completely bogus." Rather, he says, the company has been laid low in recent trading sessions by cautious notes from several high-profile analysts and a downgrade by Bear Stearns last Friday. Jones, too, recently lowered his 12 to 18-month price target on Sun stock from 70 to 55. But the move, he insists, had nothing to do with any deterioration in Sun's underlying fundamentals. In fact, he's sticking with his earnings estimate of 80 cents a share for 2001. It's just that in today's stock market, technology P/E ratios have contracted sharply, and Sun's relative valuation level has to come down, too. At a price of 55, Sun would sell at a multiple of 65 times earnings. A fair ratio, Jones contends, given Sun's superior growth rate to the S&P as a whole. To wit, he expects revenue growth of 45%-50% in the fourth quarter. While this would be a decline in the blistering top-line growth of 60% Sun enjoyed in the third quarter, the fourth-quarter number is still nicely above the company's long-term 35% growth rate. Conventional wisdom insists that Sun will soon be laid low by reduced demand for its products from the beleaguered dot.com industry. Yet Jones says Sun is still experiencing torrid growth of 70% and 40%, respectively, in servers and storage devices. The supercharged demand is now coming from brick-and-mortar Fortune 500 companies. "Now that they have their Y2K remedial spending behind them, the big corporations are really starting to embrace the Internet e-commerce model in a big way," Jones explains. "The 'Net is becoming integral to not only reaching customers and vendors, but to the very way companies are run internally, and this will be a big boost to Sun." In short, Sun, though not affording the delectable buying opportunity of three years ago, may again be an interesting value. -Jonathan R. Laing