Brocade's Post-Earnings Selloff May Have Provided An Entry Point

Brocade Communications Systems, Inc. BRCD shares took a beating following the above-consensus results, which revealed weakness in the core business.

Argus’ Jim Kelleher reiterated a Buy rating on the company with a price target of $13.

Entry Point

Kelleher believes the selloff offers an attractive entry point into Brocade Communications, “which is now positioned to break out of slow-growth mode.”

Solid Q3

The company reported 7 percent year-on-year growth in its Q3:16 revenue, driven by the recently acquired Ruckus Wireless Inc RKUS.

Brocade Communications reported non-GAAP EPS of $021, which represented a year-on-year decline but beat the consensus expectations.

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However, excluding Ruckus Wireless, the IP business was adversely impacted by the weak federal government spending.

“Although fibre channel storage results matched the company’s outlook, investors wanted more given the relatively stronger performance by SAN rival NetApp and by flash array pure-plays,” Kelleher mentioned.

Outlook

Management issued its guidance marginally below consensus, although the analyst noted investors were raising their forecasts, rather than lowering them, following the robust Q3 performance.

“The Ruckus acquisition provides wireless access revenue to help Brocade break out of its slow growth mode. For the longer terms, Ruckus and other niche assets such as SteelApp increase Brocade’s ability to steer traffic toward its core data center products,” Kelleher stated, while adding, “Despite current tepid IT spending, we believe the long-term strategic plan is in place.”

At time of writing, Brocade was down 1.78 percent on the day, trading at $9.02.

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