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Sun stock holds steady despite warning

Shares close on par with the previous day, despite a profit warning that has halved some companies' stock.

Sun Microsystems held up to analyst and investor scrutiny Friday, as shares showed no change despite a profit warning that has halved some companies' stock.
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Sun: The lights aren't out
Scott McNealy, CEO, Sun

Shares in Sun, which makes networking computer equipment, closed Friday on par with the previous day's close of $20.81. The stock is off considerably from a peak of $64 on Sept. 1.

Sun sliced revenue projections for the third quarter from between 20 percent and 30 percent growth to between 10 percent and 13 percent growth and chopped earnings estimates to 7 cents to 9 cents a share, well below First Call's expectation of 15 cents a share. The warning didn't come as a surprise to analysts, but its magnitude did.

"While the lowered guidance was expected, its magnitude was not," said Credit Suisse First Boston analyst Amit Chopra, who nevertheless maintained a "buy" rating.

Even management expressed surprise at both the magnitude and abruptness of the economic slowdown. Executives noted on Sun's conference call yesterday that this is the steepest drop-off seen in 25 years in the industry.

Analysts were surprisingly positive on the stock, given the severity of the company's revisions. Long-term outlook on the stock was optimistic, but most analysts agreed that it will suffer for at least a couple of quarters.

"Over the near term, i.e., through the next two quarters,

Meta Group says Sun Microsystems is feeling the impact of Net companies that are scaling back on spending and forced to rely on actual profits rather than IPOs and venture capital.

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the stock could face tough sledding owing to several factors: a weak economic outlook for capital expenditures, tough comparisons and a more competitive environment," said Bear Stearns analyst Andrew Neff, who maintained his "attractive" rating on the stock while lowering estimates.

Despite lowering estimates, analysts found several positive aspects about Sun compared with its peers, and they found hope in a new product that is just being unleashed: Sun's UltraSparc III microprocessor.

Neff said that despite the warning, he remained confident in the company because of its "competitive position, its ability to identify and penetrate new market opportunities, its ability to execute under a variety of difficult business conditions (Y2K, Asian weakness), and the upside from the new UltraSparc III product cycle it has just entered."

Chopra found a benefit in Sun's indication that international sales remain strong and that it does not expect any inventory buildup this quarter. She also noted that with UltraSparc III chips now shipping in volume and with higher-end server announcements expected in the coming months, the company is well-positioned for the eventual rebound in information technology spending.

Wasserstein Perella analyst Stephen C. Dube also said he continues to recommend purchase of the stock and pointed out that the company's plans to invest heavily in research and development should improve its competitive position after the tough times are over.

He added that given Sun's position, the company should still be able to reach his $45 price target.