Brocade Ahead of Earnings

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Brocade Communications Systems (NASDAQ: BRCD) is set to announce earnings after the closing bell on Monday Nov. 19. The company is expected to report that it has continued on its trajectory of significant earnings and revenue growth, posting solid numbers despite the general slowdown in IT spending. While the results should serve as a positive catalyst for the stock, it is the company’s emerging position in ‘Big Data’ solutions that foretells dramatic growth for the company. Based on solid operating results and important growth potential, acquiring shares into earnings has the potential to offer a positive edge.

By the Numbers

Brocade has posted positive earnings beats in the last eight straight quarters, with a ninth expected on Monday afternoon. Last quarter, the company grew year-over-year revenue from $502.9 million to $555.3 million – an increase of over 10%. Profits also grew on a year-over basis, coming in at $0.09 per share against an expectation of $0.00. Earnings metrics have been strong for the company, meaning a current report in line with expectation should be considered bullish.

While the bulk of analysts rate the stock a hold, the company is expected to more than double profits for the most recent quarter; the consensus estimate is $0.11 per share. Revenues are expected to fall from last quarter, but grow on a year-over-year basis to $538 million. The increase represents a 7% rise in this statistic and is another bullish factor for the stock.

Big Data for the Longer-Term

Considering the specifics of a company’s earnings release can give you a significant advantage in selecting an attractive entry point, but it is important to consider the longer-term prospects of the stock in case the immediate reaction to the release is unexpected. If you are comfortable with the medium and longer-term outlook of the stock, a short-term loss does not need to result in realized losses. While some traders are willing to take positions in stocks they do not want to own beyond the earnings reaction, unless this is a core strategy, I do not recommend that approach.

Not only does Brocade have very attractive prospects across its pending earnings announcement, the company’s longer-term outlook is very attractive as well. The company, which specializes in networking equipment, recently announced a strategic alliance with Hyve Solutions, a division of SYNNEX (NYSE: SNX) that will put it at the forefront of what many believe is the next significant growth area in technology: Big Data. This is a fairly new, but rapidly growing field that will allow participants to provide customers comprehensive analysis of enormous datasets.

According to IBM (NYSE: IBM), Big Data can be described as follows: “Every day, we create 2.5 quintillion bytes of data — so much that 90% of the data in the world today has been created in the last two years alone. This data comes from everywhere: sensors used to gather climate information, posts to social media sites, digital pictures and videos, purchase transaction records, and cell phone GPS signals to name a few. This data is big data.” From this information, companies are discovering that important predictions can be made about the habits of those individuals that the data describes. This information may become an invaluable part of marketing efforts.

The partnership between Brocade and Hyve will create an industry-leading solution that is expected to become a major growth engine for both companies. The Brocade VDX 8770 Switch creates a “flexible VCS fabric that is designed for both scalability and performance.” Hyve brings its expertise in servers and storage to the effort that creates a combined product that will be hard to rival: “this networking infrastructure creates a custom, turnkey, fully integrated, network, server and storage solution specifically designed for Big Data environments that require innovative server and storage designs.”

The Trade

Heading into Monday’s post-close earnings announcement, Brocade looks well positioned for both an immediate pop and longer-term success. While I would be hesitant to establish a full position before the news is released, getting some exposure should yield a nice move if the company beats expectations again. A miss is likely to hurt shares, but the future is sufficiently bright that it is worth the risk. As such, I would buy shares Monday and add to your position after the market reacts to the numbers.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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