RBC Sees Limited Upside in Redback

Mark Sue, an analyst at RBC Capital Markets, today cut his rating on Redback Networks (RBAK) to Sector Perform from Outperform, noting that the stock has reached his $21 price target. Sue says he does not see any meaningful additional gains from current levels.

Sue adds that “further delays at British Telecom and Deutsche Telekom” on new network projects may also limit upside to near term estimates.

Sue says fourth quarter results should be in line with revenue of $78 million; he says EPS should be a penny better than the consensus estimate of 13 cents a share due to operating expense control. “Following a quarter where the book-to-bill declined and deferred revenues decreased 21% sequentially, smaller Asian deals may help Redback close the quarter with a book-to-bill greater than 1.0,” he writes. “Some backlog estimates of $100 million, however, may be overly aggressive, in our view.”

Sue says speculation regarding a possible takeout of Redback may persist, but adds “we do not believe a deal is imminent.” Sue says Cisco (CSCO) and Juniper (JNPR) are “unlikely suitors considering the product overlap” while Alcatel-Lucent (ALU) “is working on an improved switch fabric for its family of switches.” Motorola (MOT) “may have its hands full with its wireless product transition, the pending acquisition of Symbol (SBL), and the integration of Broadbus.”

Concludes Sue: “With the shares now trading at 33x the consensus 2007 earnings, we think its best to take some profits.”

Redback shares today are down 81 cents at $19.91.