Brocade: Smaller Cisco Rival's Got Chops

SAN JOSE, Calif. (TheStreet) -- Brocade(BRCD Quote) may not be the biggest name in tech, although the switch maker is fast emerging as a viable challenger to Cisco(CSCO Quote) in storage networking. With companies now opening up their corporate coffers, investors will be closely monitoring the company's analyst day next week for evidence of upside.

Brocade, which competes with Cicso(CSCO Quote), Emulex(ELX Quote) and QLogic(QLGC Quote), has had plenty of analyst love in recent months. Storage is seen as one of tech's big growth areas, and Brocade enjoys strong business fundamentals in a fluid market.

With tech spending creeping back, the switch maker is seen as well positioned to reap the benefits of the broader economic recovery.

"Management may indicate that Brocade is also seeing some improvement in demand just like most other IT hardware vendors," wrote Kaushik Roy, an analyst at Wedbush Morgan, in a note released Thursday. "Our own checks lead us to believe that other Storage Area Network (SAN) vendors such as Emulex and QLogic are seeing slightly better linearity in this quarter compared to other quarters."

Brocade's long-term prospects have also been boosted by Cisco's decision to enter the server market with the launch of its Unified Computing System.

The UCS launch sent shockwaves through the sector and prompted a war of words with Cisco's long-time partner Hewlett-Packard(HPQ Quote).

With many tech firms creating new alliances, Brocade could easily step into the vacuum left by Cisco. The San Jose, Calif.-based firm recently expanded its reseller deals with Dell(DELL Quote) and IBM(IBM Quote), and is rumored to be forging a partnership with H-P to resell its Ethernet products.

Roy says that the H-P deal is probably priced into Brocade's stock, so it does not foresee any significant near-term catalysts. However, the analyst does not see any real downside, either.

"Brocade is still a great story, and in our opinion it is not late to buy the stock if one has a horizon of more than six to nine months," he wrote. "Investors want to see market share gains translate into EPS upside, which we believe will accelerate in a quarter or two."

Earlier this year, Brocade forecast sales between $2.1 billion and $2.2 billion for fiscal year 2010 and may tweak this projection next week, thanks partly to revenue synergies from its $2.6 billion Foundry acquisition.

"We would expect Brocade to increase guidance to encapsulate our current estimate of $2.2 billion," wrote Munjal Shah, an analyst at Jefferies & Company, in a note. Analysts surveyed by Thomson Reuters are expecting fiscal 2010 revenue of $2.21 billion.

In its recent third-quarter results, however, Brocade missed analysts' revenue estimates, despite growing sales 35% year over year.

The analyst community largely shrugged off this miss. "After a slight disappoint last quarter, our checks suggest there is increased focus on the Local Area Network (LAN) business," wrote Shah. "We believe pipeline has improved with an increase in deals in mid-single-digit million range, but close-rate is uncertain."

Brocade shares dipped 4 cents, or 0.49%, to $8.06 shortly after market open Friday, reversing the modest advance in tech stocks that saw the Nasdaq rise 0.25%.

-- Written by James Rogers in New York