Morgan Stanley Ups Brocade

Morgan Stanley Dean Witter & Co.s decision to upgrade Brocade Communications Systems Inc. (Nasdaq: BRCD) came as a surprise to the market Tuesday in the light of recent missed earnings and gloomy projections from EMC Corp. (NYSE: EMC) and Veritas Software Corp. (Nasdaq: VRTS) (see EMC Hammered).

The Wall Street investment bank upgraded the stock to Outperform from Neutral and set a price target of $36. At 4:00pm EDT Brocade’s stock was at $29.18, up 3.81 percent against the previous day of trading.

While saying it remained concerned about visibility in 2001, Morgan Stanley says it sees the stock as oversold and expects investors to look at the longer-term picture. "We believe that over the next 12 months we will see a recovery in enterprise spending, particularly in the storage networking space, and are encouraging investors to start building positions," the firm’s report states.

Morgan Stanley also revised its EPS estimates for Brocade slightly downward, to $0.28 from $0.30 for 2001, and to $0.47 from $0.51 for 2002.

Overall, the report shows that Morgan Stanley likes the long-term picture for Brocade: “We believe that the valuation is justified by a dominant position in a lightly penetrated market.” MSDW estimates that SANs currently have less than 20 percent market penetration, “which should lead the SAN segments to growth rates higher than the overall storage market,” the report says.”The company is using its dominant position in SAN hardware to entrench its software in the network,” the report adds, noting that Brocade is now investing better than 50 percent of its R&D in software initiatives.

While all this bodes well for Brocade, Morgan Stanley’s upgrade focuses heavily on the FC switch-maker's ability to ship its Silkworm 12000 in large quantities in early 2002. This product will see extensive competition from the startup market, which is something Brocade has little experience of so far.

It sits comfortably on 80 percent of the FC SAN market but its Silkworm 12000 is intended to break it into new markets for connecting storage over gigabit Ethernet and IP -- a sector teeming with promising startups(see Sanera Guns for Brocade).

— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com