Sun falls as investors fret ahead of conference call

Investors are growing increasingly skittish about Sun Microsystems ahead of the company's mid-quarter conference call Thursday. Shares fell Wednesday as Merrill Lynch downgraded the stock ahead of what many analysts expect will be a profit warning.

Shares of Sun (Nasdaq: SUNW), which makes workstations, storage devices and servers, were off $2.13 to $20.13 in early trading Wednesday. The stock has closed down for two consecutive sessions since it announced the mid-quarter call. Investors have taken CEO Scott McNealy's presence on the call, and its timing--4:30 EST, after the closing bell--as a sign that bad news is on the way.

Bernstein analyst Toni Sacconaghi said in a research note that McNealy typically doesn't attend these mid-quarter calls. Sacconaghi also observed that Sun usually hosts its conference calls intraday, and investors were taking the two signs as "strong signals that numbers were coming down."

A downgrade from Merrill Lynch analyst Tom Kraemer also compounded the worries about Sun. Kraemer downgraded Sun to "neutral" from "accumulate" and lowered estimates for the company Wednesday.

"Economic softness appears to be accelerating (the) non-economic trends that threaten Sun," Kraemer said in a research note.

Sun had already disappointed analysts and investors in January when it lowered its outlook for 2001.

Kraemer noted that economic problems have only become worse. As Sun loses out on a storage boom, the company will face inventory problems.

"We continue to like Sun's server position, but we think storage matters more," Kraemer said. Sun is missing out on revenues in the strong storage sector as storage vendors gain influence, and the company's "poor storage execution appears to be coming home to roost," Kraemer said.

According to the Merrill analyst, Sun's channel inventories are at a three-year high, with more used equipment from dead dot-coms on the way. Kraemer said it could take three quarters for Sun to burn through the glut of equipment.

The analyst cut his 2001 earnings estimate to 65 cents a share from 68 cents a share, and 2002's earnings projection to 84 cents a share from 89 cents a share. Revenue targets for the third quarter, fiscal 2001 and fiscal 2002 were also cut, to $4.98 billion, $20.7 billion, and $25.9 billion, from $5.1 billion, $20.9 billion, and $26.1 billion, to respectively.

Sacconaghi also cut his estimates on Tuesday due to Sun's limited visibility, but added more optimistically that the "investor spook" over Thursday's conference call could provide "an attractive entry point for long-term investors." He maintained a "market-perform" rating on the stock.

"While there is a reasonable chance that Sun will lower expectations for the next two quarters on Thursday, we think the stock is attractively valued at current levels," Sacconaghi said.

The stock could double in the next 12 to 15 months, and its "valuation is attractive at today's levels, and compelling at $20 or less," he said.