Wednesday, November 23, 2011

Store Your Net Worth with QLogic

All those Facebook pokes and tweets create lots of data that companies need to store and retrieve across far-flung computer networks. To keep up with the growth in all that data, companies need to buy so-called network storage. Does this demand growth mean you should buy shares in two of the biggest network storage vendors -- Brocade Communications Systems (NASDAQ: BRCD) and QLogic (NASDAQ: QLGC)?

The network storage industry is big and growing fast. According to Infonetics Research, in the first quarter of 2011, the so-called Storage Area Network (SAN) switch and adapter market grew 9.8% from the previous year to $755 million. And Infonetics cites the tremendous demand for cloud storage in estimating that the market will grow at a 20% annual rate through 2015 and ending that year at three times its 2011 revenues.

And Brocade and QLogic are significant players there. Brocade claims to have 70% of the SAN market while in 2010 QLogic claimed that it controlled 54.5% of a related market -- Fibre Channel adapters.

Brocade reported better than expected financial results Tuesday and its shares rose 6%. Its quarterly revenue of $550 million and EPS of 16 cents compared favorably to analysts' expectations. According to Barron's those expectations were for revenue of $527 million and EPS of 10 cents a share and Brocade beat them by 4% and 60% respectively.

Moreover, Brocade looks to beat expectations in the current quarter as well. That's because it forecasts revenue in the range of $530 million to $550 million and adjusted EPS ranging from 12 cents to 14 cents -- and both are above analysts' forecasts of $535 million and 11 cents, according to Barron's.

When QLogic reported its second quarter results at the end of October, revenues and EPS were ahead of expectations. QLogic's 2.5% higher revenues of $150.2 million were better than expected and its unchanged-from-2010 adjusted EPS of 28 cents were 2 cents ahead of Zacks Consensus Estimate.

So here's what the investment choice between Brocade and QLogic boils down to:
  • Brocade: barely growing, narrow margins; cheap stock. Brocade sales have increased 2.7% in the past 12 months to $2.2 billion, while net income has plunged, down 57% to $51 million – yielding a narrow 2.4% net profit margin. Its PEG of 0.62 (where a PEG of 1.0 is considered fairly priced) is inexpensive on a forward P/E of 10.1 and expected earnings growth of 16.2% to $0.39 in fiscal 2013.
  • QLogic: growing strongly, wide margins; cheap stock. QLogic sales have risen 8.8% in the past 12 months to $610 million while its net income soared 153% to $145 million -- yielding a whopping net margin of 23.7%. Its PEG of 0.86 is cheap on a P/E of 10.4 and expected earnings growth of 12.1% to $1.17 in fiscal year 2013.
QLogic wins this SAN faceoff. Its valuation is very compelling for a solidly growing company with very attractive profit margins. Brocade seems to be lagging but it could be a takeover target for the likes of Dell (NASDAQ: DELL) and might be an interesting holding for that reason alone.

But based purely on stand-alone fundamentals, QLogic is the better bet.


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