CIBC Revises SAN Stocks Down

Fearful of a bleak” upcoming September quarter across the storage sector, brokerage firm CIBC World Marketshas reduced its earnings expectations for the group of storage networking companies it covers. But the firm's maintaining a Buy rating on the stocks in anticipation of an upswing in 2002.

Paul Mansky, enterprise analyst with CIBC, says he is still optimistic about the potential for this market, but in light of the September 11 attacks, he believes IT spending has been put on the back burner, at least for this quarter.

In response, the firm has revised its sales and earnings per share (EPS) estimates for the upcoming quarter downward for Brocade Communications Systems Inc. (Nasdaq: BRCD), Network Appliance Inc. (Nasdaq: NTAP), and QLogic Corp. (Nasdaq: QLGC).

Mansky has cut his estimates for Brocade’s fourth quarter (ending October) from $120 million in sales and $0.05 in EPS to $106 million and $0.03, respectively. For the year, the firm expects sales and EPS to be $502 million and $0.27. CIBC has dropped its 12-month price target for Brocade stock from $50 to $28 a share.

Network Appliance and QLogic got similar revisions. Second quarter (ending October) sales and EPS for Network Appliance have been cut by CIBC from $200 million and $0.01 to $188 million and breakeven. The 12-month price target has been cut from $17 to $14 a share.With regard to Network Appliance, CIBC is worried about what it sees as an apparent loss of momentum, as evident in a lacklustre response to industry efforts to forge a NAS-compatible DAFS (Direct Access File System). DAFS has been viewed up to now as a key technology for next-generation NAS appliances (see DAFS Debuts). "It’s not quite a non-starter," says Mansky, “but we’ve been disappointed by the lack of broad industry support for it.”

The major roadblock stopping DAFS moving forward is Microsoft Corp. (Nasdaq: MSFT), according to Mansky. He says the software company deems the new technology to be competitive with its roadmap and plans to use its operating system to create its own generic platform for the NAS market.

Microsoft was unavailable for comment on this subject.

With respect to QLogic’s second quarter (ending October), CIBC revised its sales and EPS estimates from $88.5 million and $0.21 to $78.6 million and $0.17. For the year (ending March 2002), it adjusted sales from $368.5 million and $0.89 to $330.1 million and $0.78. Its 12-month share price target has been cut from $0.52 to $0.32.

Despite the gloomy outlook, Mansky maintains a Buy rating on all three stocks. He says he expects the sector to make a “U-shaped recovery” early next year. “The recent strength in the storage sector transcends mere short covering and represents the first positive money flow into the sector in recent months,” he asserts. “As corporate budgets are formed... we believe storage solutions will garner a larger piece of the IT budget.”He urges investors to view anticipated selling pressure as an opportunity to begin selectively committing capital to the storage sector.

CIBC isn’t the only firm lowering sales and EPS estimates for the storage sector. Most of the brokerage houses appear to be taking a more cautious approach now (see Wall St Worried About Storage and McData Feels the Pinch).

— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com