Storage Prices Might Have Outrun Growth

Saying that soaring valuations of enterprise data storage companies are ahead of growth potential, Punk Ziegel on Monday downgraded Emulex ( ELX), Brocade ( BRCD), McData ( MCDT) and QLogic ( QLGC).

Other analysts have similar concerns about QLogic, which also has been downgraded recently by Goldman Sachs and A.G. Edwards.

Since the beginning of the year:

  • McData has increased from $8.40 to $13.20, or 57%.
  • Brocade has increased from $4.60 to $7.05, or 53%.
  • QLogic has increased from $38 to $49, or 30%.
  • Emulex has increased from $20 to $24, or 20%.
  • Despite his downgrades, Punk Ziegel analyst Steve Berg said he believes there is still room for growth in the host bus adapter and switch markets. "I'm not concerned about commoditization until the end of 2005," he said.

    Speaking of QLogic, Berg wrote: "Of the four major storage networking companies we follow, the operating model is the best and most consistent. The stock has commanded a forward P/E of 33x, and a forward market-cap-to-sales ratio of 7x is very high. In our opinion, however, valuation has gotten too high. We think that 25x forward earnings is more reasonable. This yields a price target of $37. With a current share price of $47, we are lowering our rating from market perform to sell." (Punk Ziegel does not have a current banking relationship with these companies.)

    Similarly, A.G. Edwards analyst Shebly Seyrafi wrote: "We are downgrading shares of QLogic from buy/aggressive to hold/aggressive based on valuation. QLogic is a solid company, having, in our opinion, executed superbly during the slowdown and having gained meaningful share in the FC HBA market over the past few years. In addition, our distributionchannel checks for both Emulex and QLogic are strongly positive in thecurrent CQ2 quarter.

    "However, QLogic is now trading at an enterprise value/sales ratio of 7.6x our C2003 revenue estimate of $522M; this ratio is 61% higher than our 4.7x ratio estimate for Emulex, its closest peer."

    A.G. Edwards has banking relationships with Qlogic and Emulex.

    In trading Monday, Brocade lost 44 cents, or 6% to $6.86; Emulex lost 75 cents, or 3.1% to $23.76; McData fell 75 cents, or 5.3%, to $12.76; and Qlogic shed $2.58, or 5.6%, to $27.77.

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