Sun Microsystems downgraded on growth concerns

Just as Sun Microsystems (Nasdaq: SUNW) was recovering from rumors of accounting irregularities, a couple of analysts got bearish on the stock and raised questions about its growth prospects.

Shares in the server vendor were up 0.94 to 34.94 Tuesday, up slightly off the stock's close on Monday,when Sun hit its lowest level since 1999.

Sun has been dogged by rumors of accounting irregularities or revenue recognition problems. CFO Michael Lehman's denial later in the day sparked a rebound for the stock in after-hours trading, with shares rising to above 36 from a close of 34 on Instinet.

But on Tuesday, Banc of America Securities analyst Kurtis R. King downgraded the stock to a "buy" from "strong buy" and reduced the stock's target price from $65 to $48, or 44 times his 2002 estimate of $1.10 per share. He did not change estimates for the company.

King noted that demand is slowing, and though he expects Sun to meet guidance going forward, this may not be enough to please investors.

In doing channel checks, King said he "found nothing catastrophic but still a slowing from what was expected entering the quarter" over the last few weeks. His lowered rating and target were based on the slowing market, not "Sun-specific competitive or execution issues," he added.

King also said that if the company fails to extend its streak of four straight quarters of higher-than-expected revenue, it could be seen as bad news.

"Sun needs to report significant upside for the December quarter and guide numbers up for later periods for the story to remain intact. Failing to do so this quarter would be viewed as a negative turning point," he stated in a research note.

Sun's move to offer a 3 percent rebate to U.S. resellers last week was also seen as a sign that times are tough, King added, though he said he found nothing in the course of recent checks which would change his firm's bullish longer-term view on the stock.

UBS Warburg analyst Don Young also issued a research note proclaiming a cautious near-term stance on the stock while maintaining his "buy" rating.

Young said his firm confirmed reports of weakness in Sun's reseller channel Monday. One of the company's resellers told the analyst that at the point in the quarter when Sun typically pushes deliveries into the next quarter -- a practice known as sandbagging -- Sun has instead been active in trying to get business.

While Young admitted conclusions were based on conversations with just one reseller, he now expects slowing in revenue growth while the company works off the backlog and is modeling second half growth in the high 20 percent range.

He also said the greater risk for Sun, and the enterprise hardware sector in general, will come during the first half of calendar 2000. "There may even be downside to the company's guidance," Young stated.

"Sun is in a great strategic position, and we believe no one can catch them as the Unix server leader; however, we would urge caution in the short term," Young added.
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