Analyst reports: Wall Street pessimism eclipses Sun's shine

Analysts hail Sun Microsystems after a midquarter conference call, but even one of Wall Street's favorite technology companies can't pierce the dark cloud hanging over the markets.

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Analysts hailed Sun Microsystems on Friday after a midquarter conference call, but even one of Wall Street's favorite technology companies couldn't pierce the dark cloud hanging over the markets.

During the conference call Thursday afternoon, management told analysts that the Palo Alto, Calif.-based company is on track to meet the lofty objectives announced at the beginning of its 2001 fiscal second quarter.

In particular, executives predicted strong sales among telecommunications clients--contrary to relatively bearish comments from Sun competitors, who are expecting telecommunications companies to curb spending.

The executives also said they would focus on reducing a backlog by $200 million in the quarter in an effort to reduce delivery delays. Many companies fret that large backlogs and shipping delays will force clients to turn to competitors for the same products.

But Sun executives who spoke during the conference call said the backlog reduction goal was not a top priority. They adamantly reserved the right to sacrifice backlog reduction if the company receives significantly more orders than expected.

Several analysts interpreted this reservation to mean that the company is expecting another strong quarter, with some predicting that Sun may squeak by with better-than-expected results for the next quarter.

"It is important to remember that Sun typically gives very conservative forecasts," wrote Merrill Lynch analyst Tom Kraemer, who reiterated his "buy" rating Friday. "It has been low for the past three years and we expect this pattern to continue. We continue to believe that this is a software-driven business. We do not have any concerns and we would be buyers particularly on any weakness."

In a research report from Thomas Weisel Partners, analysts Doug van Dorsten and Kevin Hunt maintained their 12-month target price of $135 and their "buy" rating, affirming no change to their "bullish outlook." They expect Sun to bring in fiscal second-quarter revenue of $5.3 billion and per-share earnings of 32 cents.

"Sun remains one of our best ideas in this difficult market environment," the analysts wrote. "Strong business momentum, a large market cap and good trading liquidity provide an attractive idea in a choppy market, in our view."

Credit Suisse First Boston and UBS Warburg also reiterated their "buy" ratings.

Despite the positive comments, Sun couldn't rise above the sour mood that has gripped Wall Street. The analyst reports were overshadowed by presidential election uncertainties and a general lack of enthusiasm for technology bellwethers.

In midday trading, Sun shares were flat at $87.25. The stock is up about 13 percent since the beginning of the year but is down 22 percent since the beginning of the month.

Kurtis King at Banc of America Securities was one of several analysts who reined in optimism for Sun, despite its expected strong financial performance. King maintained his "strong buy" rating but cut his 12-month price target to $130 from $145.

Lehman Brothers analyst George Elling admitted that Sun's financial performance in upcoming quarters is expected to be spectacular--but it was tough for him to be categorically positive, given the fickle markets of the past eight months.

He expects Sun revenue to grow at roughly 47 percent in the fiscal second quarter, compared with the same quarter in fiscal 2000. Based on Sun's successful ramping of its new UltraSparc III-based products, he expects the company to realize a fiscal 2001 revenue growth of 37 percent over fiscal 2000. Sun grew revenue in fiscal 2000 at 33 percent over fiscal 1999.

Elling, who reiterated the highest "1-buy" rating, was cautious in his research note issued Friday.

"The fact that Sun has delivered outstanding results for the last few years and continues to deliver seems to be overshadowed by fear," Elling wrote. "Although we believe Wall Street will eventually return to focus on Sun's strengths, it is difficult to pinpoint when the mood will change.

"Despite this short-term fickleness, we believe that Sun is the best-positioned enterprise hardware vendor to exploit opportunities in the Internet sector, and we believe the shares represent a sound long-term commitment."