Brocade Should Show Upside - TheStreet

SAN JOSE, Calif. (

TheStreet

) --

Brocade

(BRCD)

could still offer

upside

to investors despite

Hewlett-Packard's

(HPQ) - Get Report

shocking

acquisition of

3Com

(COMS)

.

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) - Get Report

, 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."

Recent results from

EMC

(EMC)

and

NetApp

(NTAP) - Get Report

have highlighted

increased

storage spending, with Brocade expected to reap the benefits.

Brocade's results should also offer some color on the company's ongoing battle with Cisco.

A recent survey of the IT sector by Goldman Sachs showed increasing pricing pressure in Ethernet switching, reflecting increased competition from "up-and-coming" companies such as

Juniper

(JNPR) - Get Report

, Hewlett-Packard and Brocade.

"So far, heightened competition has resulted in share loss (from 75% in 4Q2008 to 69% in 3Q2009, according to Dell'Oro) rather than pricing or margin compression for Cisco," wrote Goldman Sachs analyst Simona Jankowski. "Though that could change depending on Cisco's priorities for share vs. margins."

The analyst, however, warns that there are still clouds of uncertainty looming over the economy, as well as the challenge posed by its Foundry acquisition.

"Downside risks include further deterioration in enterprise spending and the company's execution in managing a far larger product portfolio," she wrote.

With a

fast

growth profile and high operating leverage, though, Brocade may still offer value for investors. The company will hold a call to discuss its fourth-quarter results early on Tuesday, which is expected to provide more insight into its long-term strategy.

-- Reported by James Rogers in New York

.