That said, the commentary from the Street today is more mixed than you might think. For one thing, the latest quarter was not 100% clean; server sales were above expectations, and so were gross margins, but sales of storage products were disappointing. The Street was pleased that the company expects to produce operating margins of 4% by the end of the June quarter and 10% not that long after that. But skeptics contend that the 10% level is already discounted by the current stock price, and wonder if there is much upside left.
As for the KKR deal, the Street has remarkably little to say, perhaps because Sun didn’t really explain in any detail why it did it.
“While KKR’s purchase of Sun’s convertible notes could generate ancillary benefits in addition to providing capital for Sun to make investments, we don’t think it is a precursor to a larger transaction,” asserts Laura Conigliaro of Goldman Sachs.
Or maybe they will.
"Open questions remain on the KKR convertible deal,” writes Richard Farmer of Merrill Lynch. “Sun doesn’t appear to need the cash. KKR is not providing cost cutting advice. Purportedly KKR will help Sun pursue ’strategic opportunities’ which we read as acquisitions. KKR’s role is unclear, unless large leverage is required.”
Here is some commentary on the quarter:
Charlie Wolf, Needham: While the possibility exists that Sun is indeed gaining momentum, our valuation model indicates that such momentum is already reflected in Sun’s share price. The current share price, for example, implies that Sun will increase its operating margin to 10%, the company’s stated goal, and grow revenues at a 10% annual rate. In our opinion, this combination represents the upper limit of feasible possibilities. Robert Semple, Credit Suisse: Sun is moving in the right direction by supporting alternative platforms, pricing its products more reasonably, and focusing on its cost structure, however, valuation remains a sticking point, as we believe its shares are already embedding a recovery…we maintain our Underperform rating but would look to become more positive at more reasonable valuation levels. Jesse Tortora, Prudential: We are concerned about the sustainability of Sun’s margin profile due to the conversion to Fujitsu’s APL platform for high-end servers; the ramp of new high-end and mid-range products by IBM and HP, increased competition in low-end/x86 MPU-based servers, and the shift of the server market to lower price and margin products. We maintain our Underweight rating on the stock.
Andy Neff, Bear Stearns: For a third consecutive quarter, SUNW delivered better results, as revenue upside from healthy high-end/Sparc server growth, [gross margin] improvement, and lower taxes drove EPS upside. With turnaround stories, the key is margin expansion and progress against milestones, which we continue to see. Rating: Outperform. Benjamin Reitzes, UBS: While revenues were impressive, margin improvement was the story in Q2…Sold margins highlight improved execution across all businesses, better mix and reaping the benefits from cost cutting…Raising target to $8.25 from $7, maintain Buy rating. Richard Farmer, Merrill Lynch: March [gross margin] guidance of 42%-44% looks conservative to us. We’re modeling above 45%. Our estimates remain ahead of consensus and our price objective of $7 stands.
Sun rose 41 cents yesterday to $6.07.
SUNW 1-yr chart