Brocade Continues Search for Buyer With New CEO

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There has been quite a lot of activity in the data networking space recently, as large companies have snapped up acquisitions in an effort to expand their reach. Cisco (NASDAQ: CSCO) especially has been ramping up M&A activity with several recent buyouts. Brocade (NASDAQ: BRCD), another player in the data networking industry, has recently appointed a new CEO after unsuccessfully looking for a buyout. According to many analysts, Brocade’s cash flow and competitive position in switches make it an attractive takeover candidate.

Company Overview

The San Jose based company engages in the manufacture and sale of IP Ethernet networking solutions and Storage Area Networking solutions to businesses and organizations across the globe. The company has just over 4,500 fulltime employees and a market cap of $2.6 billion. The stock has a beta of 1.11 making it slightly more volatile than the benchmark, and is more or less flat over the last twelve months.

Earnings

The firm has been able to consistently deliver strong earnings over the last few years, beating analyst expectations for nine consecutive quarters. Q4 2012 EPS beat by about 21%, exceeding revenue and profitability guidance for the quarter. For full-year 2012, Brocade reported record revenue of 2.2 billion dollars with significant improvements in gross margin as well as operating margin. The balance sheet was also improved with a record operating cash flow of $591 million, and management expects similarly strong results going into 2013.

Takeover Target

As mentioned above, this networking company has been viewed as a potential buyout target for some time now, and some view the appointment of new CEO Lloyd Carney as a step towards finding a suitor. It is telling that Carney, who previously headed Micromuse and Xsigo, sold his last two companies to IBM and Oracle respectively. As such, this experience was presumably taken into account by the board, which may be looking to speed up a potential buyout. At the moment, the most likely suitor seems to be Oracle, as Carney has had earlier dealings with the IT giant which is looking to expand its product portfolio.

Valuations and Metrics

Brocade is valued quite inexpensively at the moment, with a P/E of 13.93x and a forward P/E of only 8.65x. The price to book and price to sales are both low at 1.17 and 1.16 respectively. The return on equity is around 9.2% and the operating margin is a healthy 12.4%. The firm has a little more cash than it has debt on the books and also has an impressive operating cash flow. Major competitor Cisco trades at a similar P/E, but the price to sales is considerably higher at 2.39, while maintaining an operating margin almost double that of Brocade.

Bottom Line

Brocade’s strong cash flow and product portfolio have made it an attractive takeover target, but so far no buyer has been found. Perhaps this will change soon with the appointment of new CEO Lloyd Carney, who has a solid record in selling IT firms. Aside from takeover speculation, Brocade is a very profitable networking company that has been able to deliver strong results for the last few years, and which is also priced attractively compared to the market at the moment. 


DUJames has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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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