Foundry Networks’s Cash Pile: It’s All About The Buyback

Shares of networking equipment vendor Foundry Networks (FDRY) continued to trade up in after hours trading Friday, at one point up another 3% after rising 1.86% in the regular session, to 17.50. The company Thursday night announced second quarter profit and sales that beat analysts’ estimates and announced a $200 million stock buyback to be made “from time to time.”

Sanders, Morris, Harris analyst Natarajan Subrahmanyan upgraded the stock Friday from Hold to Buy, while C.E. Unterberg Towbin analyst Rich Church upgraded the stock from Market Perform to Buy. He notes that the company’s $143.2 million of sales in the quarter came from a 16% rise in sales to telecommunications carriers and a 14% rise in sales to corporate IT shops. “FDRY continues to see strong traction with Service Providers and even large enterprises for the routers and expects a strong 2H07,” writes Church.

Church raised his numbers for this year and next slightly, to $573 million and 63 cents for this year and $644 million and 79 cents next year, not a dramatic revision, but he thinks the estimates on the Street may be underestimating the company, "because the company continues to benefit from a significant product cycle and is at the early stages of a ramp in service provider business." Church’s price target of $20 is a 25x P/E multiple of his estimate of 79 cents a share in 2008.

So, good quarter, but it sounds kind like it’s all about the buyback: the company has $5.98 per share in cash, and Church says that while Foundry “may also use its significant cash pile for acquisitions in the future, it has clearly not been acquisitive historically,” which suggests a lot of that cash will be around for stock purchases.

FDRY 1-yr chart: