Last year was a struggle to get back to even for Brocade Communications'
Despite the relatively flat year, traders on both sides of the coin have reason to be excited about Brocade in 2012. Let's take a look at some of the things that could make you want to buy, sell, or possibly hold Brocade this year. At the end, I'll weigh in with my take.
The two primary lures to buying into Brocade are the possibility of a buyout and as a value play relative to its peers.
Brocade unsuccessfully has put itself up for sale before, but many feel it could be different this time around. According to reports from The New York Times, Brocade is in the early stages of talks with private-equity firms with nothing yet being set in stone. Brocade is profitable and has supply partnerships currently in place with IBM
Brocade also makes for an intriguing value play. Having purchased 9% of its outstanding shares in its latest quarter, Brocade is trading at just 10 times forward earnings and a reasonable 1.3 times book value. It's considerably larger storage peer, EMC
There are two equally compelling reasons to be on the short-side of this trade: innovation and, ironically, value.
After paying a hefty $3.4 billion for Foundry Networks in 2008, Brocade locked in its dominance in the Fibre Channel switch market. Unforunately, when Cisco Systems
Valuation is also in the eyes of the beholder. I came to Brocade's defense in November after the company's impressive fourth-quarter results, but the rally in the stock since then has chased many would-be buyout offers away. In fact, some have speculated that with Brocade having nearly doubled from its 52-week lows, a full valuation may already be baked into the stock.
The primary reason to hold Brocade is if you feel the business will continue to generate solid cash flow, management will continue to aid profits by repurchasing shares, or if you think the company has a genuine chance to boost share value by being purchased.
Now, here's my take on Brocade...
In August and November I came to Brocade's defense, and the stock has responded with some incredible gains since then. However, I also can't help but be unimpressed with Brocade's lack of innovation for the future. Share repurchases are only going to grow earnings so much before investors realize that Brocade's growth is slowing. I am mildly optimistic that 2012 is the year that Brocade does find a buyer, but I wouldn't be looking for a huge premium over its current valuation. Temper your expectations and I think shareholders will have a much better year in 2012 than they did last year. Given this, I will be maintaining my CAPScall of outperform already in place on CAPS.
What are your thoughts on Brocade? Share them in the comments section below and consider adding Brocade to your free and personalized watchlist so you can keep track of the latest news with the company.
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