Brocade Communications Systems, Inc.: BRCD Stock Could Soar

BRCD StockBrocade Communication Systems, Inc. (NASDAQ:BRCD), the supplier of storage area networking (SAN) and Internet protocol (IP) networking solutions, has been profitable over the past four quarters and in recent years.

During its fiscal third quarter this year alone, BRCD stock reported earnings that significantly topped the consensus estimate of Wall Street analysts.

Despite being profitable, Brocade’s stock is declining. Over the past 52 weeks, BRCD stock slumped from its highest trading price of $10.94 to as low as $7.40 per share. Brocade stock is currently trading around $9.21 per share, down by more than 11%. Some investors are wondering whether it is time to exit their investments in Brocade stock or keep their positions.

If Brocade has been profitable, why is BRCD stock declining? Let’s take a closer look at its financial performance.

Brocade Stock Financial Analysis

During the third quarter, Brocade reported adjusted earnings of $0.21 per share and revenue of $590.72 million. The company’s financial results were higher than the $0.16 in earnings per share and $573.94 million in revenue forecasted by analysts. (Source, “Brocade Reports Fiscal Q3 2016 Results,” Brocade Communications Systems, Inc., August 25, 2016.)

Although the company beat the Wall Street estimates, investors were not entirely pleased with its financial performance because its adjusted earnings were 21% lower than the $0.27 per share it recorded in the third quarter last year. Brocade’s revenue was seven percent higher year-over-year, up from $552.0 million.

Investors are probably worried that Brocade stock is becoming less profitable based on its quarterly financial performance over the past four quarters.

Brocade Communications Systems, Inc. Quarterly Financial Results
  Quarter

Reported  Non-GAAP Earnings Per Share

 Consensus Estimate

 Reported Revenue

 Consensus Estimate

3Q16 $0.21 $0.16 $590.72 million $573.94 million
2Q16 $0.22 $0.22 $523.31 million $527.98 million
1Q16 $0.29 $0.24 $574.28 million $561.35 million
4Q15 $0.26 $0.24 $588.83 million $575.06 million

On an annual basis from 2012 to 2015, Brocade stock achieved a good earnings growth rate of 19.48% while its revenue growth rate was 1.34%.

Brocade Communications Systems, Inc. Quarterly Financial Results

 Year

Reported  Non-GAAP Earnings Per Share

 Consensus Estimate

 Reported Revenue

 Consensus Estimate

2012 $0.66 $0.63 $2.24 billion $2.22 billion
2013 $0.80 $0.74 $2.22 billion $2.22 billion
2014 $0.90 $0.89 $2.21 billion $2.21 billion
2015 $1.01 $0.99 $2.26 billion $2.25 billion

Brocade Stock Growth Drivers

In May, Brocade completed its acquisition of Ruckus Wireless Inc (NYSE:RKUS), a manufacturer of Wi-Fi networking equipment for enterprises and service providers that are based on Wi-Fi technology. (Source:  “Brocade Completes Acquisition of Ruckus Wireless,” Ruckus Wireless, May 27, 2016.)

The acquisition was part of Brocade’s strategy to become a pure-play networking company that supports the digital transformation era, which is changing rapidly. Brocade strengthened its disruptive mobility strategy further because the combined company has expertise and leadership in carrier-grade wireless, virtual Evolved Packet Core, mobile edge computing, and network visibility.

It is also well positioned to provide superior solutions and scale-out capabilities for emerging technologies such as OpenG technology, 5G, Internet of Things (IoT), and smart cities.

During the company’s recent earnings call with analysts and investors, Brocade CEO Lloyd Carney reported an increasing demand for the Ruckus “ZoneFlex” access point and the “Wave 2.” Ruckus announced the general availability of its cloud Wi-Fi, a wireless LAN management-as-a-service offering. These offerings are expected to provide long-term growth opportunities for the company’s IP networking business.

In the third quarter, the company launched “Brocade X6,” extending its technology leadership in the industry. Carney noted that more than 20 partners and analysts were enthusiastic about its “Brocade Fibre Channel” technology, since the “Gen 6” ecosystem is developing faster than previous generations.

Three of its original equipment manufacturer (OEM) partners are shipping Gen 6 directors. The company expects several of its largest OEM partners to connect with its Gen 6 directors and switches early next year. Additionally, some of the leading host bus adapter (HBA) providers are already shipping Gen 6 solutions.

Last month, Brocade announced that Dell EMC, Fujitsu Ltd, and NetApp Inc. (NASDAQ:NTAP) are shipping Brocade Gen 6 Fibre Channel storage networking solutions. The company said Hitachi Data Systems Corporation has been shipping Brocade Gen 6 directors, blade, and switch since July. The shipments demonstrate continued momentum for Brocade’s solutions and reinforce the trend that Fibre Channel is becoming the protocol of choice for mission-critical enterprise storage.

Carney said Brocade is laying a solid foundation for the company’s growth. He is confident that Brocade’s IP networking and storage networking businesses will deliver substantial revenue and profit over the long term.

The Bottom Line for BRCD Stock

Brocade managed to generate quarterly profits and revenues despite the challenging macro environment in the IP networking and storage networking markets. Its performance shows that its business is resilient and that its management is effective in implementing its growth strategy.

It is important to note that Brocade is one of only a few companies in the computer storage devices industry that pays a dividend to shareholders. In 3Q, the company’s board declared a cash dividend of $0.055 per share. The company’s dividend and earnings per share growth rates were more than 128% and 48%, respectively. Its annualized earnings per share growth rate, which was more than 26% from 2011 to 2015, was the highest in its industry.

Based on its financial performance and potential growth opportunities, I believe it is time to buy BRCD stock and take advantage of its current weakness.  A majority of analysts covering the stock recommended a “hold” rating. They forecasted that BRCD stock could gain more than 38% to $13.00 per share over the next 12 months.