Is Brocade a Buy Ahead of Earnings?

NEW YORK (TheStreet) -- Network equipment maker Brocade (BRCD) will be reporting first-quarter earnings on Thursday and I will be paying close attention to see if it presents sufficient justification to remain on my watch list. For as much as I have been an unabashed cheerleader of Cisco (CSCO) and the rest of the networking sector, Brocade has always been a name I have kept at arm's length.

Mainly, the stock has always been too expensive for me. I have never been able to justify paying for an equity that trades almost three times the price-to-earnings ratio of the market leader, Cisco, while also lagging in both operating and gross margins. That never really sat well with me.

However I am more than willing to give the company its share of credit for not only having managed a poor market perception, but also for navigating through a very difficult financial period -- somewhat evident in its latest earnings report.

The company's numbers were far from stellar as it demonstrated flat revenue on a year-over-year basis while dropping 10% sequentially. But I walked away from the disappointing declines still wanting to give the company the benefit of the doubt, understanding that it did beat consensus estimates on both year-over-year declines as well as its end of range, while showing decent profitability.

Expectations for the Quarter

For the coming quarter analysts are expecting earnings per share of 8 cents -- which would represent a decline of 11% from the same period a year ago. Although the company has been performing relatively well, it has seen a reduction in analysts' estimates over the past three months -- previously from 9 cents.

For the year, analysts are projecting net income of 43 cents per share -- representing an increase of almost 40% from last year. Revenue is projected to arrive at $541.4 million, a decline of 1.6% annually from $560 million. I think these are pretty modest numbers for a company the caliber of Brocade, a company that has shown a considerable amount of improvement since the beginning of the year.

I don't envision a scenario where the company does not at least meet expectations -- particularly considering the recent impressive numbers reported by both Cisco and Hewlett-Packard (HPQ). The level of optimism increases a bit more when one factors in that the entire networking sector continues to outperform and exceed analysts' expectations -- exemplified by recent reports from the likes of F5 (FFIV) and Juniper (JNPR).

Moving Forward

Its expensive valuation notwithstanding, there are still some appealing qualities to Brocade -- like the fact that it modeled Cisco's aggressiveness by acquiring one of its rivals in Foundry Networks in 2008. With the move, management sought to broaden the company a little bit more and place less dependency on its storage business and the effort appears to be paying handsomely.

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