Foolish Forecast: Sun Will Shine Again

Everyone is going through hard times right now, but Sun Microsystems (NYSE: JAVA  ) has suffered more than most. Is this the beginning of the end, or the end of a new beginning?

What Fools say:
Here's how Sun's CAPS rating stacks up against some of its peers and competitors:

Company

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating

Microsoft (Nasdaq: MSFT  )

$210.7

12.5

 ***

International Business Machines (NYSE: IBM  )

$121.2

11.0

 ***

Hewlett-Packard Company (NYSE: HPQ  )

$88.1

11.1

 ****

Dell (Nasdaq: DELL  )

$24.6

9.4

 **

Sun Microsystems

$3.5

9.4

 ***

Data taken from Motley Fool CAPS and Yahoo! Finance on Oct. 29, 2008.

The CAPS bears have plenty of vitriol for Sun. jdavis234 thinks that CEO "Jonathan [Schwartz] is a clueless hack that will never turn this company around."

On the other hand, plenty of our players still love the company. jordan8976 believes that Sun "will fare better than most tech companies in a down economy due to long term enterprise contracts. While new orders will slow, the contracts in place will carry them through troubled times."

What management does:
Sun's sales slowed year over year in the last two quarters. One more report like that, and the trailing growth numbers will start to dip into the red, too.

Margins

4/2007

6/2007

9/2007

12/2007

3/2008

6/2008

Gross

43.9%

45.2%

46.3%

47.2%

47.3%

46.5%

Operating

0.2%

2.9%

4.5%

5.7%

6%

4.8%

Net

(1.1%)

3.4%

4.4%

5.3%

4.6%

2.9%

FCF/Revenue

4.2%

3.4%

5.7%

6.4%

7.8%

5.8%

Y-O-Y Growth

4/2007

6/2007

9/2007

12/2007

3/2008

6/2008

Revenue

13.5%

6.2%

2.7%

1.4%

0.5%

0.1%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
One year ago, Sun's shares traded around 40 times trailing earnings. An 80% price reduction later, and the stock is starting to look undervalued at around 9 times trailing earnings. Fellow Fool Tim Beyers thinks so. Heck, given the weight Sun gives to the software division over its flagging hardware sales these days, maybe Oracle (Nasdaq: ORCL  ) could be interested. However, integrating Sun's hardware component would be difficult.

The balance sheet is certainly strong enough to get Sun through some hard times, with $2.7 billion in cash and only $1.3 billion of long-term debt. Back out the $1.4 billion net cash balance, and Sun is trading at just around 4 times trailing free cash flows. Unless this week's report shows a total meltdown, which I find highly unlikely, this could be a totally awesome time to buy Sun.

Microsoft and Dell are Motley Fool Inside Value selections. Try any of our Foolish newsletters today, free for 30 days. Or just sign up for a free CAPS account to find the identities of your fellow Fools who were quoted above. They might have more to tell you!

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.

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