Analysts Selectively Bullish on SANs

Deutsche Banc Alex Brown likes the sector but urges caution on some stocks

November 10, 2001

3 Min Read
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Deutsche Banc Alex Brown LLC analysts Sabrina Ricci and George Elling have begun coverage of six companies in the storage networking sector. And they say there's plenty of growth opportunity here.

According to Ricci, storage networking equipment and software sales should continue to show strength even in an extended economic downturn, given that SANs offer solid return on investment to customers.

"SAN penetration is still in the early phases and is among the few projects that is still being pursued," says Ricci.

Ricci believes that new technologies such as SAN virtualization, advanced SAN management tools, clustering, replication, and security can create additional opportunities for market penetration and the extension of existing technologies.

That said, in her note Ricci says that the near-term financial outlook is still poor. Stocks have experienced a strong rally recently on no fundamental changes. She says her stock picks are intended to distinguish those companies that she believes will be the biggest beneficiaries once the economy turns around, as well as those that are comparatively less vulnerable should a slowdown continue indefinitely.The firm initiated coverage of Brocade Communications Systems Inc., Emulex Corp., McData Corp., QLogic Corp., Quantum Corp., and Veritas Software Corp. Here are some highlights:

  • Brocade Communications Systems Inc. (Nasdaq: BRCD): DB Alex Brown initiated coverage with a Buy rating and a 12-month price target of $40 a share. The firm expects Brocade shares to outperform the market by at least 10 percent over the next 12 months. But the analysts say Brocade's success will hinge on its ability to execute on its Silkworm 12000 core switch technology, expected by year-end.

  • Emulex Corp. (Nasdaq: EMLX): Received a Market Perform rating, with a 12-month price target of $28.

  • McData Corp. (Nasdaq: MCDT): Got a Market Perform rating and a price target of $20, but DB Alex Brown is erring on the side of caution with this stock, noting: Several parts of the story create more risk than reward at this point." The competitive situation is getting tougher, Ricci maintains, with Brocade moving towards the data center and per-port pricing continuing to fall, both of which put pressure on McData.

  • QLogic Corp. (Nasdaq: QLGC): Also given a Market Perform rating with a price target of $47.

  • Quantum Corp. (NYSE: DSS): The disk drive maker was given a Buy rating and a 12-month price target of $11 a share.

  • Veritas Software Corp. (Nasdaq: VRTS): Received a Buy rating and a 12-month price target of $45 a share. "This company is in an enviable position, as a leader in a high-margin business (backup, recovery and file management software) in a long term growth sector (storage)."

At close of market Friday, Brocade shares were trading at 30.26, up 0.31 (1.14%). Emulex shares were trading at 27.86, up 1.48 (5.61%). McData shares were trading at 18.80, up 0.48 (2.62%). Qlogic shares were 46.00, up 1.72 (3.88%). Quantum shares were 9.26, up 0.01 (0.11%). Veritas shares were 35.42, up 0.24 (0.68%).

— Jo Maitland, Senior Editor, Byte and Switch

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