Brocade Communications Wins New Buy Rating From DA Davidson

D.A. Davidson sees multiple growth drivers propelling meaningful revenue and earnings upside for Brocade Communications Systems, Inc. BRCD over the next several years.

The brokerage initiated coverage of the stock with a Buy rating and price target of $12, implying a potential upside of 29 percent.

The company is strong at both Ethernet and Fibre Channel market, while its recent purchase of Ruckus adds one of the fastest growing wireless vendors to the Brocade IP product suite.

"The addition strengthens the company's position at the 'edge' of the network, provides BRCD with end-to-end networking solutions, and offers the ability to cross-sell products into the other's customer base," analyst Mark Kelleher wrote in a note.

In addition, Brocade recently began shipping the next generation of "Gen 6" fibre channel switches that offers 32 gigabits per second of throughput, twice the rate of Gen 5.

"We believe this new generation of Fibre Channel will be particularly critical for flash-based storage arrays," Kelleher continued.

Further, the analyst believes the growth would also come from newly launched high-end router, the SLX 9850.

On the balance sheet front, the company is on track to generate about $470 million in fiscal 2017 in operating cash flow, increasing to $590 million in fiscal 2018. This cash flow provides the company significant dry powder to fund dividend, share buybacks, reduce debt, and possibly M&A opportunities.