Do You Trade SUNW? Part 2
In December,
this column discussed Sun Microsystems
www.sun.com, whose stock I regard as a fundamental turnaround play.
Shorter-term, there are some positives; but long-term it still has many
strategic and tactical challenges. Long-term money in SUNW should be patient.
Last night, Sun
reported fiscal
second quarter earnings. Revenue growth was soft — down 2 percent
year-over-year — and should have been stronger, due to the positive contribution
of the weaker US dollar. This indicates Sun’s underlying business growth rate is
still weak and it has lost share. Positives include continued progress with
operating expense cuts (which help the bottom line), the release of Solaris 10,
open source Solaris, progress monetizing Java, and a solid product pipeline from
Sun Labs. Sun has a great management team and a strong cash position – over $3
billion, to fund its turnaround plans and potentially make acquisitions.
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But these positives
aren’t enough to propel Sun into the top tier of hardware companies. For that,
Sun needs sustainable high-single digit revenue growth, to better
leverage its manufacturing unit costs, rather than the low single digit growth
in the last couple of quarters.
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The
biggest issues for Sun’s prospects are generating
sustainably higher revenue growth, regaining and building market share. But
higher revenue growth is difficult for Sun because it operates in mature
enterprise IT markets, and competes against companies with significantly more
entrenched share (IBM, Dell, and HP) amid fierce price competition. On last
night’s call, management claimed that the tone of its conversations with
customers was improving. But the “tone†of conversations doesn’t mean companies
are buying, or plan to buy, more Sun products. I haven’t heard any distributor
chatter about a pick-up in the channel for Sun hardware - not an encouraging
sign. Sun’s new Solaris 10 system is an improvement, but not sufficient to
capture significantly more share.
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In
December, the SUNW chart looked
good but there were two caveats. First, as
long as it traded
above $5.25 in the near-term then the upward trend looked fine. But that didn’t
happen; SUNW pulled back to the low-$5s and failed to consolidate in the $5.25
to $5.50 range. Second, if Sun could
deliver revenue, margin, and EPS growth over the next couple of quarters, then
that fundamental momentum could have propelled SUNW into the $6 to $7 range. So
far, that hasn’t happened, and the stock has fallen back to the low $4s.
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It’s a tough strategic position for a company to be in: climbing
back after having lost market and mind share.
It’s much easier to keep existing customers than try
to win them back. Going forward, Sun has its work cut out for it strategically
and tactically, and those with long-term positions in SUNW based on its
turnaround prospects should be prepared to be very patient.
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