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Sun Microsystems (JAVA) released its fourth quarter results on 16 July and is due to release full results on 1 August. With the release of the fourth quarter results Sun did not impress Wall Street analysts. We decided to have a look at some projected financial numbers using our on-line valuation tool to see how the current share price shapes up.

JAVA Valuation

JAVA grew revenues from $11.19 billion in 2004 to $13.87 billion in 2007 – a 7.4% compound annual growth rate. Our assumptions of revenues for the next three years are $14.0 billion in 2009 growing to $15.0 billion in 2011 – a 2.6% compound annual growth rate (2008-11). We have projected EBITDA margins to be flat at 10.0% to 2011. We have used a terminal growth rate of 2.5%. We used a terminal capital expenditure number of $600 million. We have used a WACC (discount rate) of 12%.

Valuecruncher valuation model of JAVA with interactive assumptions

Our analysis incorporates the cash and debt on the JAVA balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of $11.64 per share which is 14% above the current share price of 10.21.

Based on our analysis the current share price looks undervalued. In our view the key assumption is the EBITDA margin moving forward. If JAVA can increase its EBITDA margin to 12% in 2011 that lifts our valuation to $13.91 (36% above the current share price). However if JAVA’s EBITDA margin dropped to 8% in 2011 that lowers our valuation to $9.38 (8% below the current share price). Play with our assumptions – what does your analysis say?

Stock position: None.

Source: Sun Microsystems: This Quarter's All About the Profits