Sun Microsystems: This Quarter's All About the Profits

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.

Comments

[Mr Mojo Risin:]

"JAVA grew revenues from $11.19 billion in 2004 to $13.87 billion in 2007 – a 7.4% compound annual growth rate."

They bought STK in in 2005 for $4.1B. If you take out that expensive waste of cash and revenue piece their revenue is in free fall.

2008 Jul 31 01:03 PM

[caper:]

So what if they bought StorageTek? They have grown their revenue through the addition of STK revenue. Do you look at a company like IBM or Oracle and say, gee they really wouldn't have grown if they had not bought all the companies they did? Give me a break. Sun purchased STK. This purchase has resulted in revenue growth. That's a good thing for any company. End of story.

2008 Jul 31 03:24 PM

[Mr Mojo Risin:]

Sorry should have been more specific. Most companies buy other companies to grow the combined revenue, not hide declines or pretend to grow.
STK Revenue for the full year 2004 was $2.22 billion compared to $2.18 billion for 2003.
For the full 2004 fiscal year, Sun reported revenues of $11.185 billion, a decline of 2.2 percent as compared with $11.434 billion for the full 2003 fiscal year.

$11.185+$2.18 = $13.385 Sun revenue (with STK) is flat

sec.edgar-online.com/2...

www.sun.com/smi/Press/...

2008 Jul 31 04:23 PM

[fire_Jonathan:]

- When the Sun's BOD is going to fire both Jonathan and Scott. Their performance and leadership are dismal. The stock price was at it lowest in 13 years validated their terrible execution of the company. It's time to bring in the fresh blood executives and CEO. Buying back $1 billion of stock and then give them to these losers is really a waste. Investors need Carl Icahn on on Sun's BOD to have actions on these failing executives

2008 Aug 01 08:33 AM

[Mr Mojo Risin:]

Let's look at the last 10 Years.....where have all the billions gone?
Sun just wasted $3B on buying back their stock in the last six months which did not improve its price and now it is going to waste $1B more. Pretty soon they will not have any cash to make them an attractive acquisition.



finance.yahoo.com/echa...;range=19980801,200808...

2008 Aug 01 11:01 AM