"The Sun may rise in the east,
but at least,
it settles in a fun location.
It's understood
that Hollywood
is Californication."

-- From "Californication," by the Red Hot Chili Peppers, from the 1999 album Californication

Santa Clara, Calif., is home to enterprise-computing expert Sun Microsystems (Nasdaq: JAVA), which reports third-quarter earnings on Thursday night. Are we looking at a sunrise or a sunset? And will there be tequila involved? Let's go find out.

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

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating (Out of 5) 

Microsoft (Nasdaq: MSFT)

$268.8

16.8

***

International Business Machines (NYSE: IBM)

$170.1

16.0

***

Hewlett-Packard (NYSE: HPQ)

$116.5

16.1

****

Sun

$14.1

18.6

***

Red Hat (NYSE: RHT)

$4.1

58.0

**

Data taken from Motley Fool CAPS on 4/30/08.

Several CAPS players think this stock has hit rock bottom and that the only way left to go is up. All-Star player criticalthinker likes the product portfolio and thinks the worst is over: "Almost going under gave SUN a good look at itself. They're now taking a more conservative growth path while leveraging there impressive IP."

But you can't please everybody. Other players wonder where Sun is going these days and are calling it a short-sale opportunity and a plain old disappointment. Player eskatonic puts it succinctly:

When was the last time Sun did anything good for the shareholders? ya exactly. over 10 years.

What management does:
About a year ago, the effects of a major cost-cutting program brought Sun back to profitability after a few dark years. Sales growth stagnated at the same time, but the end result is a healthier business with dependable profits and generous cash flows.

Margins

10/06

12/06

4/07

6/07

9/07

12/07

Gross

43.0%

43.6%

43.9%

45.2%

46.3%

47.2%

Operating

(3.2%)

(1.0%)

0.2%

2.9%

4.5%

5.7%

Net

(5.9%)

(3.2%)

(1.1%)

3.4%

4.4%

5.3%

FCF/Revenue

1.6%

4.7%

4.2%

3.4%

5.7%

6.4%

Y-O-Y Growth

10/06

12/06

4/07

6/07

9/07

12/07

Revenue

21.2%

18.0%

13.5%

6.2%

2.7%

1.4%

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:
The company has spent a net of $1.95 billion to buy back 10% of its shares over the past three quarters, with another $800 million left of that repurchase program. Sun also forked out $1 billion to acquire database vendor MySQL AB back in January, a move that brought the company into direct competition with the likes of Oracle (Nasdaq: ORCL). After that combined spending spree, there's still $2.2 billion of net cash on Sun's balance sheet.

I don't quite get how Sun's "everything for everyone" strategy can lead to such an improvement in the business, and I'd much rather see the company decide whether it's a hardware designer or a software provider and then run with either Solaris or the Sparc systems. Selling Solaris on IBM systems with Intel (Nasdaq: INTC) chips, at the same time as supporting both Linux and Microsoft Windows on Sun-made machines ... well, it seems like a mishmash of ideas in search of a strategy.

But hey, whatever these guys are doing seems to be working. Sun has outperformed Wall Street's expectations in five of the past six quarters, and it last missed an earnings estimate in 2005. Let's see whether the streak can stretch further.

Fool on:

Intel and Microsoft are fellow Motley Fool Inside Value recommendations. 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.