Brocade's a Buy, Says Analyst

Storage may not be sexy, but Brocade presents a big buying opportunity, according to an analyst.
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SAN JOSE, Calif. (TheStreet) -- Few people would describe storage networking as the sexiest part of the tech sector, but switch specialist Brocade (BRCD) presents plenty of upside to investors, according to at least one analyst.

Brocade, which makes switches for storage networks, is currently trading at about $6.40, making it an attractively-priced "strategic asset," says Brian Marshall, an analyst at Broadpoint AmTech.

The storage specialist, which bought

Foundry Networks

in 2008, has experienced a recent selloff, with its share price slumping almost 15% this year. For Marshall, though, this presents investors with a great buying opportunity.

"We continue to focus on the fundamentals and believe Brocade remains an extremely attractive asset with a cheap valuation," he wrote in a note released on Tuesday. Broadpoint, he added, is reiterating its buy rating and $11 price target for Brocade's shares.

The analyst feels that potential share loss to rival

Juniper

(JNPR) - Get Report

and alleged weakness in Brocade's federal business have weighed heavily on its stock, but he says that investors should not be unduly concerned.

"Foundry's federal vertical would need to decline over 55% quarter-over-quarter in order to have a 1 cent impact on Brocade's overall EPS in the January '10 quarter," he said. "The federal portion of the Foundry business is not material to Brocade's overall bottom line."

Brocade reports its first-quarter results on Feb. 22. Analysts surveyed by Thomson Reuters are expecting sales of $547.79 million and earnings of 15 cents a share, compared to $431.6 million and 15 cents a share in the prior year's quarter.

The Silicon Valley firm, however, has not been without recent challenges.

Brocade's Q4 profit fell

6% as costs counteracted a sales hike, although the company reiterated its guidance for fiscal 2010.

Brocade could also face a major threat with

Cisco's

(CSCO) - Get Report

UCS device

, which marked the networking giant's entry into the blade server market, enabling Cisco to present itself as a sort of Swiss army knife for the data center.

Broadpoint's Marshall nonetheless feels that UCS could actually boost Brocade's business, pushing Cisco rivals

IBM

(IBM) - Get Report

and

Hewlett-Packard

(HPQ) - Get Report

closer to the storage specialist.

Repeatedly

cited as a potential acquisition target

for

Hewlett-Packard

(HPQ) - Get Report

prior to the tech bellwether's surprise

purchase

of

3Com

(COMS)

, Brocade remains something of a

Wall Street

darling

.

The storage firm already

partners

with IBM,

Dell

(DELL) - Get Report

and H-P.

Sun Microsystems

, now part of

Oracle

(ORCL) - Get Report

, is also a partner, although Brocade has a particularly deep relationship with H-P going back ten years. The company even describes its Storage Area Network (SAN) products that are resold by H-P as the broadest offering of its technology on the market. Brocade is also rumored to be forging a deal with H-P to resell its Ethernet, or IP, products.

"It is an unusual combination these days to find an investment opportunity in the technology sector that possesses both year-over-year revenue growth in calendar year 09 and has an attractive margin structure as well," explained Marshall, predicting a first-quarter gross margin of 60.5%.

Brocade is not the only storage company enjoying

improving demand

for its products. Rival

Emulex

(ELX)

, for example, recently

confirmed

that a growing number of big-name tech firms are selling its technology.

-- Reported by James Rogers in New York

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