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Sycamore Networks (OTCQB:SCMR) at first glance is a valuation play, with $3.25 of cash and short-term investments on the books and the stock trading at $4.04. Its earnings have been all over the place, but it looks like revenues are starting to grow slowly.

With the acquisition of Eastern Research, pro forma results indicate growth of roughly 10% in revenues FY07 over FY06, but still the company was not profitable. The company is actually far from being profitable considering it had a $60 mln loss from operations. The reason SCMR came so close to breaking even is that the company earned over $47 million from the cash hoard.

Analysts roughly project a 13% growth in revenues in FY08. The market is currently valuing SCMR as cash on hand plus 1.5x sales; that sounds about right.

Let's say an investor takes and tries to value Sycamore through their non-GAAP earnings trailing P/E. That would give a trailing EPS of $0.09, but once Interest Income is netted out, that leaves a non-GAAP loss of roughly $0.07 per share. Even in FY06 when the company was GAAP profitable, netting out interest income would give a loss of roughly $0.07 per share.

With Sycamore projected to grow revenues 10% over the the next 2 years, and no GAAP profitability net of interest income, this looks like it is valued properly on the market. There are also no catalysts on the horizon. It could be worth something when it's trading closer to cash value, but there is not enough upside to get involved.

SCMR 1-yr chart:


Disclosure: I don't have a position in SCMR.

Source: Sycamore Networks Is Far From Profitable