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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Dealer who wrote (33937)	3/18/2001 9:01:26 PM
From: Dealer	Read Replies (1) \| Respond to of 65232

TECH KNOWLEDGE • From S&P By Jim Corridore March 16th Stick with Data Storage Stocks The current slump masks the industry's stellar long-term prospects. Here are the best ways to play the eventual recovery Jim Corridore is a technology industry analyst for Standard & Poor's Printer-Friendly Version E-Mail This Story Tech Knowledge Archive • Find More Stories Like This If you own stocks in the data storage industry, you have undoubtedly been shocked by the severity of their recent selloff. Perhaps you have invested in this industry with an eye on its enormous growth potential, or were attracted to this group based on the likelihood that it would do better than most other industries in an economic downturn. Maybe you looked at past performance and saw startling growth rates -- and no reason why they should end. You may have been correct in your reasons for investing in the industry, but you have undoubtedly felt the pain. Year to date through March 9, 2000, the Standard & Poor's Computer Peripherals index (S&P's proxy for the data storage industry) was down 42.7%, while the S&P Super 1500 Composite Index had only declined 6.3% and the S&P 500 was down 6.6%. EMC Corp. (EMC ), which makes up a large portion of the Peripherals index, dropped 48.3% over the same period. With a few exceptions just about every company focused on the data storage industry has seen its stock get pummeled so far this year. Is the end in sight for growth in this sector? Do corporations no longer need to save the data their employees are busily accumulating with every mouse click, e-mail and spreadsheet creation? Has some new technology been invented that could represents a competitive threat to the need for data storage? The answer to all these questions is a great big NO. NOT IMMUNE. What has happened is that investors and analysts alike have found out that in an economic slowdown, data storage is not as immune to reductions in information technology spending as we had all believed. Longer term, all these data items have to be put somewhere, but in the short term it appears that companies have found a way to delay some storage purchases. This has led to some notable changes in guidance from storage companies, including Emulex (EMLX ), Brocade (BRCD ), Q-Logic (QLGC ), Network Appliance (NTAP ) and even industry leader EMC Corp. (EMC ), who recently increased the range of its revenue guidance to include the possibility for slower growth. On top of this near term easing in IT spending, visibility into revenue and earnings forecasts has been severely limited by the current economic slowdown and cautionary ordering patterns by many corporations. Also, in many cases IT purchasing decisions are now being made by a company's CFO--or even its CEO--rather than the IT manager, leading to delays in the decision making process. However, while these may be near term negatives, longer term, we know that corporations are looking to increase their spending on storage. Most major surveys indicate that that percentage of total IT spending dedicated to storage should grow from 50% of the total to about 75% in the next few years. COMING BACK? The key question, of course: When do we return to business as usual? S&P feels that by the third quarter of 2001 things will begin to pick up and by the fourth quarter will start really humming again. So in our opinion what you are looking at is a couple of quarters of slower growth in this sector. While the increased risk has warranted some corrections in these stocks, we feel that investors will shortly start to focus on the longer-term fundamentals. And the longer-term picture in not only intact, it is extremely robust. Due to the exponential data creation we are seeing, the data storage industry should continue to grow faster than overall IT spending and be one of the fastest areas for revenue and earnings growth. A look a the long term Wall Street consensus earnings growth estimates for some of the leading data storage companies illustrates our point. The consensus long-term EPS growth target for EMC is 30%, for Network Appliance and Brocade it is 50% and for Qlogic and Emulex it is 35%. You would be hard-pressed to find an industry where so many players are seeing this type of growth. TOP PICKS. So which data storage stocks does S&P favor right now? We have a 4 STARS (accumulate) ranking on EMC Corp., the largest storage company in the world and the market share leader in just about every segment it competes in. We expect EMC to benefit more than any other company from the above mentioned trends, and the company has a track record of staying ahead of the technology curve and investing its dollars in the next needed area of storage. Trading at 37 times our 2001 EPS estimate of $0.95, the shares do not reflect these factors. Another favorite: Brocade Communications, also ranked 4 STARS. Brocade is the market share leader in storage area network (SAN) switches. This sector is picking up steam due to its ability to provide IT managers with improved reliability, scalability and manageability of data at a sharply reduced cost of ownership. While Brocade said that the March quarter will show little sequential growth over the December quarter, it is still seeing healthy year over year growth, and expects a return to strong sequential growth in the June quarter. Trading at 47 times our $0.60 fiscal 2001 (Oct.) EPS estimate, the shares are trading below their growth rate, but still sharply above the overall market. The bottom line? We are seeing an industry that will post incredibly strong growth in the future, but along with everyone else is feeling some near term pain. S&P would argue that current stock prices are looking too much at the present and not enough at the future. The future for the data storage industry is robust and the stock prices will eventually come to reflect this fact.