Brocade Should Show Upside

SAN JOSE, Calif. (TheStreet) -- Brocade(BRCD Quote) could still offer upside to investors despite Hewlett-Packard's(HPQ Quote) shocking acquisition of 3Com(COMS Quote).

Brocade, which reports its fourth-quarter results after market close on Monday, has been firmly in the spotlight since partner Hewlett-Packard announced it was buying rival 3Com. Brocade had been touted as a possible Hewlett-Packard acquisition target, so Wall Street has been carefully weighing the acquisition's potential impact.

Brocade's stock slumped in the initial aftermath of the 3Com announcement. After staging a modest rally, Brocade shares dipped again and are now trading around $8, below its 52-week high of $9.84.

Brocade had struck a bullish tone prior to the Hewlett-Packard/3Com news, so investors will be closely monitoring the company's fourth-quarter results. During its September analyst day, Brocade raised its 2010 revenue outlook, although its earnings projection fell short of Wall Street's expectations thanks to the impact of its Foundry Networks acquisition.

Brocade's management also discussed plans to become a $10 billion company and reiterated the company's desire to remain focused on enterprise networks, unlike rival Cisco(CSCO Quote), which has branched out into server sales and the consumer market.

Analysts surveyed by Thomson Reuters expect Brocade to post revenue of $521.09 million and earnings of 13 cents a share. In the same period last year, Brocade posted sales of $398.5 million and earnings of 20 cents a share, excluding items.

Wedbush Morgan analyst Kaushik Roy thinks that Hewlett-Packard's 3Com acquisition should not cause Brocade too many problems.

"While the acquisition makes Hewlett-Packard a competitor of Brocade for enterprise Ethernet switches, we believe that Brocade will continue to be Hewlett-Packard's preferred partner for storage switches," he wrote, in a recent note. "Even if the acquisition does complete, [Hewlett-Packard] will not have a Fibre Channel over Ethernet (FCoE) switch to address convergence in enterprise networks."