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Brocade & Cisco: Who's Out of Order?

Shares of Brocade Communications Systems Inc. (Nasdaq: BRCD) jumped 20 percent today after a Wall Street analyst upgraded his rating on the company -- but Cisco Systems Inc. (Nasdaq: CSCO) says a critical part of the analyst's rationale for doing so is simply wrong.

John Roy, an analyst with Merrill Lynch & Co. Inc., issued a note this morning raising his rating on Brocade from Neutral to Buy.

In part, he justifies the brighter outlook for Brocade on mounting challenges he believes Cisco will face as it tries to penetrate the Fibre Channel switch market, which is dominated by Brocade and McData Corp. (Nasdaq: MCDTA).

"We believe it will be 12 months before Cisco has the right products to make a run at Brocade and McData," he writes in the note. "Recent information points to the immaturity of the products."

Other factors Roy cites in his note include Brocade's improved competitive positioning against McData; his belief that Brocade has "fixed its inventory problem," which has been a drag on earnings the past few quarters; and strong continued demand for SANs. Based on these trends, Merrill Lynch raised its estimates for Brocade's fiscal year 2003 from $526 million and earnings of $0.03 per share to $532 million and $0.04 per share. For fiscal year 2004, it raised estimates from $631 million and earnings of $0.07 per share to $638 million and $0.12 per share because of better gross and operating margins.

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