Sun Gets Riskier - Analysts

Oct.21.08 | About: Sun Microsystems (JAVA)

As Eric noted last night, Sun Microsystems (JAVA) pre-announced results for its fiscal first quarter ended in September that are below estimates as the company feels the impact of a slowing economy, according to CEO Jonathan Schwartz. Estimates are coming way, way down. And price targets are coming down, but there is still upside if you believe a company with an inconsistent track record and lack of growth can find a way out of the gloom. Revised price targets are substantially above the current price, especially given today’s drop in the stock.

Citi’s Richard Gardner is lowering his price target to $7 from $8, though he maintains a “Buy” rating on the stock, with the added caveat of “High Risk.” While Sun gave no “color” as to which regions or customer segments are providing the most pain, Gardner writes that “The company’s large financial services exposure and relative lack of recurring revenue surely played a part.” Gardner cut his profit outlook for this year to 12 cents from 52 cents, and for next year from 68 cents to 40 cents. He’s looking for sales of $12.7 billion this year and $12.64 billion in the year ending June 2010. Gardner thinks “the probability of a transformational event (divestiture, sale, management change) is rising,” as is the prospect of much more extensive cost cutting. However, Gardner adds that given Sun’s substantial cash — $2.7 billion, versus a market capitalization of $3.54 billion — there should be no near-term liquidity crisis for the company.

Meantime, Barclays Research’s Ben Reitzes is more dire in chopping estimates for this year and next. Reitzes now sees sales falling this year by 7%, to $12.85 billion, down over a billion dollars from his prior estimate, with a net loss per share of 38 cents versus a prior estimate for profit of 50 cents. For next fiscal year, Reitzes is looking for breakeven, down from a prior estimate of 78 cents, and for revenue to decline by 1% to $12.69 billion, compared to a prior estimate of $14.1 billion. Ouch! Reitzes maintains a “Neutral” or “Equal Weight” rating on the stock and cuts his price target to $6 from $8.50. Reitzes doesn’t mention liquidation or merger, but he expects restructuring (or lack thereof) to be the key topic for the earnigns call on Oct. 30.

Sun shares are down $0.99, or just over 17%, at $4.80.