Storage stocks have lost some of their starch this summer.

The four major players yet to report June results --

Brocade

(BRCD)

,

Emulex

(ELX)

,

McData

(MCDT)

and

Network Appliance

(NTAP) - Get Report

-- are down anywhere from 2% to 23% since July 1, after a six-month rally. And they may still be priced too high, based on estimated earnings.

But the companies that have

already reported, particularly

Veritas

(VRTS) - Get Report

, were generally impressive, and analysts are expecting strong results from the rest. What's more, there are some indications that the sector is moving into a refresh cycle, because the last major round of buying was about three years ago.

The most recent signal

sounded Wednesday when

EMC

(EMC)

said it will meet its previous third-quarter profit guidance, be profitable for the rest of 2003 and report revenue growth in the midteens in the second half of this year and 2004. The Hopkinton, Mass., company also said at its yearly analyst meeting that it expects gross margins to improve to 48% or greater by the fourth quarter of 2004.

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Interestingly, EMC may be benefiting from

Hewlett-Packard's

(HPQ) - Get Report

still-incomplete digestion of Compaq. Some HPQ customers are apparently turning to EMC because H-P's storage sales force, now dominated by Compaq veterans, is attempting to push customers toward H-P products instead of superior third-party storage products that the company sold in the past, said analyst Kaushik Roy, of the research house Susquehanna International Group. (Susquehanna does not have an investment banking business.)

Guidance, of course, is always key, but with storage share prices

outrunning growth, it will be especially significant during the reports of the next few weeks, said Punk Ziegel analyst Steve Berg. "People already know the

June quarter was good -- it's priced in." Berg, who called the July downturn, believes valuations may now be realistic.

Investors will learn more about the shape of the storage market when Emulex announces fiscal fourth-quarter earnings and guidance after the bell on Thursday. Analysts expect the company, a leader in the market for host bus adapters to meet expectations of a 22-cent profit on sales of $81.88 million, up from 16 cents and $70.2 million a year ago.

Brian Tanous of Merriman Curhan Ford & Co. expects Emulex's September guidance to be fairly conservative -- revenue growth ranging from flat to 2%-- but is looking for a stronger December quarter. "The budgets are there and it feels like the start of a refresh cycle in storage products." The strong winter should extend to other storage companies, said Tanous, whose company does not have a banking relationship with ELX.

One caveat on the upgrade theory: The last big upgrade cycle in storage was driven, in part, by the then-booming dot-coms, said Clay Sumner, who follows storage for Legg Mason. This time, the cycle will be smaller, he said. And storage stocks, with the exception of Veritas, are probably still selling for too much, he said.

Berg wants to see Emulex project sequential growth of 2% to 5% for the September quarter. If not, investors could take that as a signal that rival

QLogic

(QLGC)

is stealing market share. Punk Ziegel does not have a banking relationship with Emulex.

Sumner also will be looking for signs that Emulex continued to profit from sales related to

IBM's

(IBM) - Get Report

T-Rex mainframe, as well as to H-P. (Legg Mason does not have a banking relationship with Emulex.)

Meanwhile, competition in the SAN switch market is heating up.

In mid-July,

Cisco Systems

(CSCO) - Get Report

landed its largest-ever SAN switch deal -- an agreement worth an estimated $10 million to $14 million, according to Samuel Wilson of JMP Securities.

Although the deal isn't large in comparison to Brocade's or McData's revenue, it may give investors the impression that Cisco is gaining share, and thus hurt stock prices, Wilson notes. Cisco isn't likely to have a major effect on those companies for at least another year, he said. (JMP does not have a banking relationship with those companies.) Nevertheless, storage investors should follow Cisco's progress in this area.