Brocade Kicks Into Gear

Includes: BRCD, MCDTA
by: Eric Savitz

Shares of storage systems provider Brocade (NASDAQ:BRCD) have jumped more than 9% following last night’s report of better-than-expected profits for its fiscal fourth quarter ended October 31. The results have spurred a flurry of analyst notes, most of them upbeat on the company and its prospects. The Brocade world is divided into two camps: those who worry that the company’s pending acquisition of rival McData will cause integration issues; and those who are more focused on the strong results.

Here’s the rundown:

  • Glen Hanus, Needham: Upgrade to Buy from HoldFollowing a period of significant restructuring, we believe the combined company has the potential to be much stronger given: 1) SAN switch consolidation to essentially a BRCD/Cisco duopoly; 2) potential for continuing price stability; 3) product line, [headcount], asset rationalization that should occur.
  • Daniel Reounard, Robert W. Baird: We maintain our Neutral rating on shares of BRCD. While we are impressed with recent strength and share gains, we believe integration challenges, including roadmap consolidation and customer retention [regarding the company’s pending acquisition of McData (MCDTA)], present a greater risk than current valuation reflects.
  • Shebly Syrafi, Caris & Co.: We continue to encourage investors to buy shares of Brocade as the company now is executing very well, storage demand trends remain strong, and the SAN switch space will shortly become an effective duopoly…Maintaining Buy rating.
  • Laura Conigliaro, Goldman Sachs: Brocade’s beat and raise is largely reflected by the stock’s 12% appreciation over the past week (including yesterday’s after-hours rise), likely keeping the shares rangebound until more definitive news about McData can be rolled into Brocade’s results. With Brocade’s fundamental momentum intact, we are raising our 12-month price target to $9.25 from $7…Brocade’s acquisition of McData, whose recent earnings announcement points to deteriorating profitability, raises the prospects for unplanned transition and integration challenges…Rating: Neutral.
  • Samuel Wilson, JMP Securities: Despite solid results, we believe that investors need to take a wait and see approach to the company as it sets about the process of integrating the almost equally-sized McDATA and faces what we believe will be increased competition from Cisco. While we believe that the McDATA merger will be a net positive for Brocade over the long run, we also believe that Brocade will face significant near-term integration challenges that could benefit Cisco as customers seek the certainty of a stable player in the market. Rating: Market Perform.

Brocade shares today have gained 72 cents to $9.21. McData, which is being acquired by Brocade in a stock deal, and therefore trading in lockstep with Brocade, is up 52 cents at $6.36.

See: Brocade Communications Systems F4Q06 Earnings Call Transcript