The Real Story: Blister in the Sun Microsystems
What made me really take notice of Sun is the fact that in the past few quarters, several big value players have been accumulating shares. Dodge & Cox, known as a deep value player, picked up more than 137 million shares in the third quarter and another 115 million in the fourth, giving the firm a 7% stake in Sun. Brandes Investment Partners, another value investor, added 46 million shares to its existing 57 million-share stash in the third quarter. The Merrill Lynch Basic Value Fund (MDBAX) also purchased 7.5 million shares to bring its third-quarter total to 22.9 million.
Merrill Lynch Basic Value portfolio manager Bob Martorelli, who considers himself a contrarian, acknowledged that Sun's is not a perfect story. "We hope they find some religion on the cost side," he says. "Most of the companies that we look at underperform on margins and we hope they'll return to historical levels."
Sun's operating margin for fiscal 2005 was negative 1.04% compared with its 10-year average of 5.82%. Net margin was negative 0.97% compared with the 10-year average of 1%. Martorelli is further emboldened by Sun's balance sheet, which includes $2.5 billion in cash and just $1.1 billion in debt.
He believes the company can eventually earn 40 cents per share and trade at a 15 multiple, or $6 per share. On Tuesday, Sun shares rose 1.4% to $4.39.
Get a Leg UpFund managers like Martorelli are banking on some of Sun's new initiatives such as its so-called Niagara-based servers to drive revenue, which it is hoped will flow to the bottom line. Niagara is a new processor that uses less energy and costs less to operate than traditional processors. The servers have received very good reviews for performance and power consumption. Even some sell-siders acknowledge that the new processor has a leg up on the competition. "With Sun and Rackable Systems (RACK) the only two significant server vendors really addressing these customer concerns in a serious way at this point, there could be market share shifts toward those players coming in the low-end server space," says Thomas Weisel Partners analyst Kevin Hunt, who owns shares of Sun. (Thomas Weisel Partners has an investment banking relationship with the company and makes a market in the stock.)
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