Goldman Cuts Sun Rating as Revenues Expected to Dim

Jan. 8.09 | About: Sun Microsystems (JAVA)

Sun Microsystems (JAVA) shares coming under pressure Thursday morning after Goldman Sachs analyst David Bailey cut his rating on the stock to Sell from Hold. He cut his target price to $3, from $5.

“Sun’s heavy concentration of financial services, telecom and manufacturing customers and overweight dependence on a secularly declining segment (UNIX servers) put Sun at a disadvantage during this downturn versus more diversified competitors,” he writes in a research note. He says most of this is in the stock - down 79% in 2008 - but says that a 76% uptick in the stock since the beginning of December and a 30% move in just the past three days “creates a compelling entry point,” by which he means a chance to short the stock.

Bailey expects Sun’s revenue to be down in the low double-digits in 2009. He also says the company’s gross margin has begun to break down due to lower business volumes and more aggressive pricing, “exposing Sun’s bloated opex levels and causing Sun to return to losses.”

Bailey increased his loss forecast for the June 2009 fiscal year to a loss of 59 cents a share from a loss of 26 cents; for FY 2010 he now sees a profit of 37 cents, down from 78 cents.

Thursday morning the stock was down 35 cents, or 6.9%, to $4.74.