Is Brocade the Next 3Par?

Posted Sep 8th 2010 12:40PM by Derek and Damien Hoffman
Filed under: Rumors, Dell (DELL), Hewlett-Packard (HPQ), Newsletters, International Business Machines (IBM), EMC Corp (EMC), Bargain Stocks

The tail-end summer heat has been heavily attributable to the mergers and acquisitions blaze. Companies are putting their cash to work on public companies fetching discounted equity prices in a market environment favoring safety (e.g., gold and bonds).

Recently, Hewlett-Packard (HPQ) edged out Dell (DELL) for the 3Par deal award. With an eye toward the future, HP displayed their powerful desire to own a piece of the data storage and cloud computing pie. Since Dell ended empty-handed, it's only a matter of time before the next stock is a tech heavyweight's prime target.

Is Brocade cheap and easy? 3Par is now trading at over a $2 billion market cap. 3Par generates over $3 revenue per share and has $2 cash per share, with zero debt (a Cheat Sheet framework characteristic). According to MarketWatch, data-storage sales rose 20% in the second quarter. These double-digit growth numbers are very sexy for larger companies.

Meanwhile, Brocade Communications (BRCD) is valued at a $2.6 billion market cap and is generating almost $4.70 revenue per share and has under a $1 cash per share, yet holds a debt burden of just under $1 billion. On a forward P/E basis, 3Par is trading at 121 times forward earnings and Brocade is trading at little over 10 times future earnings.

Dell is a key deal maker in a red-hot space. It's only a matter of time before they capture the headlines again with a new offer on the table. It could not hurt to also keep an eye on EMC (EMC) and IBM (IBM) potentially participating in the technology consolidation as they hand pick companies on the cusp of the future.

Speculation is back after a solid month of action. Can you stomach the risk yet?

Derek and Damien Hoffman are co-founders of the highly acclaimed Wall St. Cheat Sheet Premium Newsletter.

Tags: 3Par, BRCM, brocade, Dell, Hewlett-Packard, HPQ, IBM, investing, ma, profits, stocks, tech ma, technology

Print this

Reader Comments (Page 1 of 1)

9-09-2010 @ 1:29AM

NetGuy said...

I'm not so sure.

Almost 2/3 of Brocade's business is through OEM channels via HP, IBM, EMC, and Dell. If one of those companies buys Brocade, won't the others be tempted to dump them and take their OEM revenues elsewhere?

At 1/3 of its current revenues, does Brocade still look cheap, especially when you factor in the premium over the current market price that an acquirer would have to pay?