THE DAY AHEAD: Is Newbridge Networks a bargain?

One upside surprise won't make Wall Street believe in Newbridge Networks (NYSE: NN), but some analysts are guessing the company's shares will outperform the broader markets in upcoming months.

Newbridge beat estimates with fiscal first quarter sales of 18 cents a share after market close Tuesday.

Newbridge Networks: A bargain?

But first it's time for all those dreaded caveats. Leading up to the most recent earnings reports, Newbridge missed five out of eight quarters. In fact, this quarter just reported was viewed as a godsend because the networking company didn't issue a profit warning. Of course estimates for the first quarter had been lowered following previous earnings hiccups.

Put simply execution is an issue and the risk is clear. Newbridge has great technology, but historically hasn't connected the dots when it comes to a bottom-line performance.

Newbridge said it fixed supply issues, managed expenses and reported strong growth as it started "improving credibility with investors.''

Not so fast.

Newbridge is in the "penalty box" for at least another quarter, said Michael Cristinziano, an analyst with Gerard Klauer Mattison. But Cristinziano is still bullish on shares of Newbridge. Analysts are evenly split on Newbridge's prospects.

"Newbridge is fundamentally cheap relative to its peers," said Cristinziano, who sees gains ahead if Newbridge executes and possibly more appreciation if takeover talk heats up. "I like the prospects for Newbridge as a stock." The analyst said takeover speculation would heat up as Newbridge shares rose. Cristinziano said he thinks Newbridge can hit the $50 range pretty easily.

Chandan Sarkar, an analyst with SoundView Financial, agrees and is one of the five analysts calling Newbridge a "strong buy." Sarkar points to Newbridge's asynchronous transfer mode (ATM) products as a reason to be optimistic. The ATM market is expected to post strong growth as the need for bandwidth increases.

Newbridge's wide area network sales were up 12 percent in the quarter with ATM sales jumping 16 percent in the quarter.

Newbridge squares off with Cisco Systems Inc. (Nasdaq: CSCO) and Lucent Technologies' (NYSE: LU) Ascend unit. Analysts said Newbridge is holding its own in the field.

And compared to unproven networking high-flyers such as Juniper Networks (Nasdaq: JNPR), up 550 percent since its June IPO, Newbridge looks cheap. Newbridge has a large installed base of about 350 customers to leverage while many newly-public highflyers have just a handful of clients.

It should be noted that Newbridge shares are cheap for a reason -- Wall Street doesn't trust the company. Newbridge officials urged analysts not to change estimates. First Call consensus for the second quarter is 22 cents a share, followed by 26 and 31 cents a share in the third and fourth quarters.

Wall Street is also looking for more details regarding Newbridge's Internet Protocol (IP) products. Officials said the company will make some announcements before its September 23 analyst meeting. Newbridge already holds a stake in Juniper and could either invest or buy privately held networking companies Ironbridge Networks Inc. and Northchurch Communications Inc.

Newbridge's IP push is expected to be at least partially funded by its Juniper stake. It paid $9.7 million for its 1.7 million Juniper shares, an investment worth about $376 million at Juniper's closing price Tuesday.

For now the big question is whether Newbridge can deliver bottom-line performance and an IP strategy. Newbridge's latest earnings are just a start.