Three months ago, investors caught a glimpse of sunshine, as Sun Microsystems (NASDAQ:SUNW) saw its sales rise for the first time in a year. It was a great way to start off fiscal 2006; tomorrow at 4:30 p.m., we'll learn whether the company was able to keep its streak going in fiscal Q2 2006.

Wall Street Wisdom:

  • General consensus. Analysts aren't yet convinced that the Sun will come out tomorrow. Twenty-one of them follow the company up on Wall Street, with "sell" ratings outnumbering "buys" seven to two. The bulk of the Streeters are still hedging their bets with "hold" ratings.
  • Revenues. That's not to say the analysts think Sun's sales will slump. On the contrary, they're calling for sales to rise 23%.
  • Earnings. It's just that they don't expect those sales to yield any profits. Again. Sun hasn't earned a penny of profit in three quarters. Analysts expect it to lose a penny tomorrow.

Margin watch:
Sun's margin trends support the thesis that it's getting its act back together (slowly). Rolling gross margins have risen steadily on both sequential and year-over-year bases. Net profits are still a ways off, it seems, but we're getting there.

Margins
%

6/04

9/04

12/04

3/05

6/05

9/05

Gross

40.4

40.6

40.6

40.9

41.5

42.2

Op.

(6.0)

(3.9)

(3.2)

(1.9)

(1.0)

(1.5)

Net

(3.5)

(2.1)

(0.8)

5.9

(1.0)

(0.9)

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

Valuation metrics:
Anyone who thinks that penny stocks are by definition "cheap" needs to take a close look at Sun. The company sports a $15 billion market cap, but it's unprofitable, and it generated just $125 million in free cash flow over the past 12 months. That puts the firm's price-to-free cash flow ratio firmly in the triple digits, right where its forward P/E ratio sits (its trailing P/E is, naturally, negative.)

Competitors:
You can judge a company by the company it keeps. Sun, at $15 billion, is definitely a player (albeit an expensive and poor-performing one), as evidenced by the fact that its major competitors include such tech giants as IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and Hewlett-Packard (NYSE:HPQ).

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Fool contributor Rich Smith does not own shares of any company named above.