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It's Time for Brocade to Sell and Cisco to Buy

Stocks in this article: BRCD CSCO HPQ EMC DELL

NEW YORK ( TheStreet) -- Choosing the right entry point for Brocade (BRCD) has always posed a difficult challenge for me.

Maximizing value should always be investors' top priority when deciding whether or not to take a position in stocks in this category. While trading a low price, Brocade is somewhat expensive when compared to rivals like Cisco (CSCO) and Hewlett-Packard (HPQ), which trade at more attractive price-to-earnings ratios.

Be that as it may, Brocade is in an industry showing decent growth. And there is a lot to like about the company's business and, in particular, its management, whose main objectives include broadening the company and lessening its dependency on its storage business, where it competes with the likes of EMC (EMC) and NetApp (NTAP).

So far, its strategy has been working perfectly -- perhaps too perfectly. I think the company may continue to draw M&A attention, this time from some of its rivals.

Brocade recently reported second-quarter earnings results that topped analyst estimates by a respectable margin. However, like Cisco and Dell, the company issued guidance that will likely keep the stock range-bound at least until it announces results for the next quarter.

Its numbers continue to force me to question exactly how well its business is truly performing, particularly its Ethernet business. Although the recent results inspired confidence with a revenue beat, the numbers showed a 1% decline annually and a decline from its fourth-quarter report, which was already considered unimpressive by many standards.

On the positive side, Brocade's margins continue to trend in the right direction, though this was hardly enough to convince Wall Street the stock deserves a higher multiple from where it now stands. Overall, its numbers were far from horrible. While that is far from a raving endorsement, it is hard not to keep things in perspective, especially when more prominent names such as Dell (DELL) continue to have struggles of their own.

For that matter, Dell continues to be mentioned among potential buyout suitors for Brocade, and, on many levels, it makes a lot of sense. However, with its recent acquisition of SonicWall and the distractions surrounding integrating the two businesses, I don't envision a deal with Dell ever materializing.

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