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Sun sees upside in stock drop

The sun actually may be rising instead of setting for Sun Microsystems, despite the downside the company has seen of late.

The sun actually may be rising instead of setting for Sun Microsystems (SUNW), despite the downside the company has seen of late.

The workstation maker's stock, which has plummeted about 21 percent just during the month of March, benefited today from an analyst upgrade, which reversed some of those losses. The stock gained about 4-11/16 to end the day at 42-7/16.

Salomon Smith Barney analyst John Jones raised his rating on Sun shares to "buy" from "outperform."

"We believe part of Compaq's server softness is due to the 450's [Sun's workgroup server unit] success," Jones said in a note to clients.

"We believe [Sun] is benefiting from the confusion, due to the Digital (DEC)/Compaq (CPQ) merger, surrounding Alpha server direction," he said, noting that the unveiling of Sun's 450 server last August was targeted directly at both Compaq and servers running the Windows NT operating system.

"[Sun] is the cleanest story around," said J.P. Morgan analyst Daniel Kunstler. "In Asia-Pacific, what dominates is the low end of the line. Their offset discussion is perfectly credible."

The company's recent stock drop has made it an attractive investment, Merrill Lynch analyst Steven Milunovich said in a research report released today. "We think the stock is getting too inexpensive to pass up for long-term investors."

In addition to an attractive stock price, high-end Unix server and storage demand, paired with a winning strategic focus, puts Sun in a good position for the next two years, Milunovich said, noting that Sun?s strengthening position as a high-end vendor should shelter it from the PC industry?s problems.

"We remain bullish on Unix server demand," he said.

Sun is holding on to the No.1 position in Unix workstations by a wide margin, according to a recent International Data Corporation (IDC) report. In 1997, Sun shipped 285,815 Unix workstations, nearly three times as many as Hewlett-Packard (HWP), which shipped 108,165 for the year.

Yesterday, Sun said that it does not plan to pre-announce earnings, and that it still thinks 60 cents a share is a reasonable target, according to the report. That confidence bodes well in analysts' eyes, especially given that bellwether companies like Compaq and Intel (INTC) already have announced that they will miss expectations.

In its most recent quarterly results, Sun posted net profits of $149.4 million, or 38 cents a share. Excluding a $110.1 million acquisition charge for Encore Computer's storage products business and Chorus Systems, Sun would have posted profits of $223.2 million, or 57 cents a share.

Interest in Sun's low-end workstations, dubbed Darwin, has exceeded expectations, and Sun?s high-end business lends some protection because Unix server demand is strong, said Milunovich, noting that storage revenue also should grow rapidly.

"We don?t want to be naive, and much of the quarter remains to be done, but we don?t sense disaster here," he said.

Hewlett-Packard and Compaq have seen a weakening in corporate PC and server demand, he said, and "that could put some price pressure on Sun?s workstation and low-end server businesses."

HP surpassed Sun to become the No.1 workstation vendor in 1997, when Unix and NT workstations were counted together.

Reuters contributed to this report.