Brocade Wows Wall Street

Investment firm Merrill Lynch upgraded Brocade Communications Systems from a neutral rating to a buy rating after the storage networking gear maker’s earnings rose 38 percent in the fourth quarter.

Brocade Monday posted income of $20.4 million, or 8 cents a share, up from $14.8 million, or 6 cents, in the same quarter a year ago. The San Jose, Calif., concern’s revenue rose 13 percent to $155.6 million, from $137.8 million in the same period a year earlier. Revenues for 2004 were $596.3 million, a 14 percent increase from the $525.3 million reported in 2003.

Impressed by Brocade’s results in a difficult market, Merrill Lynch elevated Brocade shares from neutral to buy, setting a 12-month price objective of $9.50. Brocade shares currently trade at $7.33.

Brocade and rivals Cisco Systems and McData hold the top three spots in the storage networking gear sector. The vendors craft switches and other products used to shuttle data faster across storage systems.

Brocade has enjoyed a busy year in innovation, issuing the SilkWorm Multiprotocol Router through EMC , HP and StorageTek ; a new release of its Fabric Operating System; and the launch of the SilkWorm 4100 midrange fabric switch.

ML held Brocade at neutral due to strong performance from rival Cisco Systems, which had grown its storage business sequentially by 41 percent in the July quarter. But Cisco’s storage networking sales slackened in the October quarter, according to its last earnings report, falling 2 percent.

The firm attributed Brocade’s progress in part to the Cisco decline. It also attributes the company’s progress to its ability to execute in the face of tough competition from Cisco and McData, both of whom unveiled new products this year.

“In the face of aggressive competition from McData and Cisco, Brocade has been able to increase both gross and operating margins meaningfully,” the research note said. ML estimated the company’s 15.5 percent operating margin from the fourth quarter will balloon to more than 20 percent in 2006.

ML expects Brocade to continue to find success through a number of scenarios, including possible consolidation and sales of promising products.

“With competitors having problems in the SAN switch market, there could be additional consolidation in the space, which would help remaining players like Brocade,” ML said.

Going forward, ML expects Brocade will reap the rewards from its multiprotocol router, which the firm said could pad the company’s revenue by $20 million alone. Blade server sales from IBM, HP, Dell and others could also boost Brocade’s business.

The investment firm also raised its fiscal year 2005 earning per share estimates for Brocade from 31 to 33 cents per share, and from 33 to 40 cents per share for 2006.

Article courtesy of InternetNews.com