Emulex tanks, analysts cite market and sales concerns

Emulex (Nasdaq: EMLX) plummeted 45 percent Friday despite topping estimates for the third quarter. Analysts blamed the dip on the markets, and slowing growth in the company's fibre channel business.

Shares in the supplier of network access products, printer servers and fibre channel adapters were down 37 7/16 to 45 1/2. Emulex has surged since announcing a 2-for-1 stock split in November.

"Obviously a large part of this is the market," said William Lewis, who covers the stock for Chase H&Q. "A lot of high valuation stocks are coming down, especially those that have had steep runs."

Shares have climbed to a dizzying high of 225 1/2 from a low of 9 5/16 earlier in the year.

Lewis said that though the company beat estimates, investors may have expected more upside. Emulex said Thursday that third quarter net income was 20 cents per share, well above First Call's consensus of seven analysts which predicted a profit of 18 cents a share.

Third quarter revenue doubled year-over-year to $36.5 million from $18.2 million.

But those results weren't enough to please Wall Street.

"It's more than just the market," said Glenn Hanus, an analyst with Needham & Co. "People get used to analysts raising estimates after every quarter."

Hanus raised estimates slightly, putting fiscal year 2000 expectations at 71 cents a share, up from 68 cents a share. Hanus didn't put a price target on the stock, considering the volatile market conditions.

In a report for U.S. Bancorp Piper Jaffray, analyst Paul Mansky wrote that while the company's top line came in about $1.5 million better than the investment firm's $36 million estimate, fibre channel sales grew a scant 9 percent sequentially, versus 31 percent in the prior period.

Although the company should see success in penetrating new business, he said upside may be limited as the majority of the market is dominated by Sun Microsystem (Nasdaq: SUNW) and JNI (Nasdaq: JNIC).

"Although the stock has lost in excess of 60 percent of its capitalization since March 27, we believe the negative money flow has yet to subside. We would again look to be acquirers as the stock encroaches on the $65 range," Mansky said.