Updated from 3:12 p.m. EDT

Shares of Brocade Communications ( BRCD) were higher Tuesday after Merrill Lynch offered positive comments on the storage company, upgraded its stock and raised its earnings estimates.

In a research note, Merrill put a buy rating on Brocade, saying the company is improving its competitive position against McData ( MCDTA) and Cisco ( CSCO) and has resolved original-equipment manufacturer inventory issues.

Brocade is seeing continued strong demand and stable pricing for storage area networks, the firm said, while having an "attractive" valuation relative to its past prices and to McData.

Merrill also said it believes Brocade's Fabric OS upgrade is more significant than the market thinks, and that it could be 12 months before Cisco has the right products to make a run at Brocade and McData.

The firm raised its fiscal 2003 sales estimate on Brocade to $532 million from $526 million and its earnings estimate to 4 cents a share from 3 cents. For 2004, Merrill now expects Brocade to post a top line of $638 million, up from its prior forecast of $631 million, with earnings of 12 cents, up from the old prediction of 7 cents.

Additionally, Merrill, which previously had a neutral rating on the stock, set a price target of $7.75 on Brocade.

Shares of Brocade closed at $7.27, up $1.23, or 20%, in Nasdaq trading.

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