BRCD - Sector: Technology---Industry: Computer Storage Devices

[setravis]

Tech
Will Dell Buy Brocade?

Is Dell shopping for a networking equipment company to buy? Canaccord Genuity analyst Paul Mansky thinks so. In a research note this morning, he notes that Dell "has been busily assembling a full IT stack aimed at realigning the company away from secularly less attractive legacy businesses (like PCs) and incrementally toward future growth in the enterprise.
But he adds that "given networking will most likely be among the most critical source of intelligence" helping to reshape the stack, "not owning this technology puts Dell at risk of simply hopping from one commoditized business into another."

Ergo, he thinks Dell  will be shopping for a networking company, and soon, for several reasons:

•The PC market is arguably headed into an accelerating secular decline (units and ASPs) at the hands of tablets – Dell's cash engine.
•Dell has clearly been seeing success cross-selling Ethernet switching with servers and storage, evidenced by reported results and qualitative commentary from Dell executives.
•Dell's this week made a shelf filing for a potential $3.5 billion debt filing; the company also has $7 billion in net cash.

Mansky says his bet is that Dell with bid for Brocade, a company he rates a Buy with a $7.50 price target; he thinks Dell; could pay as much as $10 for the company.

"We view Brocade as the most likely target for myriad reasons," he writes. "First is the absence of alternatives.
Juniper is 80% service provider – not Dell's business – and Extreme and Force10 carry insignificant share. Second, Brocade's Fibre Channel  business should be an attractive cash engine for at least five years...Finally, Brocade owns Fibre Channel (70% share), exceptionally tight support for which is a must (our view) in a converged world. Net, Fibre Channel is high ROI, legacy Ethernet is low investment and converged products (recently introduced) are the growth engine."

Mansky's theorizing about a deal for Brocade has the stock on the rise: BRCD on Thursday morning is up 48 cents, or 7.2%, to $7.165.

[setravis]

Great Speculations
Buys, holds, and hopes...

Brocade Put Sellers, Call Buyers Prepare For Dell Bid
Jun. 2 2011

Today's tickers: BRCD, IP, APOL & DHI

BRCD – Brocade Communications Systems Inc. – Options volume is heavy in switcher-maker Brocade after a broker note predicted that it fits the bill for a bid from Dell. Shares in Brocade reached a 52-week high after the analyst noted that cash-rich Dell filed a debt-shelf earlier in the week of $3.4 billion or just about enough to buy Brocade if it wanted to change course and enter the networking market. One investor appeared to sell 11,400 put options expiring July at the $6.00 strike presumably on the assumption that its shares remain a hotbed of speculation for the next several weeks. The analyst's note put a price tag on the stock of $10.00 underpinning a surge in the stock, which rose to $7.20 at the day's best. Call options expiring next month were also well bid with the $8.00 strike proving most popular. Around 25,000 options granting the right to buy were exchanged with a current price of just 20 cents indicating a one-in-four chance of success over the next five weeks.

IP – International Paper – Notable activity in options on the paper-maker indicate one investor giving up on a good idea. Options volume of 20,935 on Thursday was made up of just two trades involving 10,000 lots each in what appears to be the closure of a losing calendar spread. On May 19 when shares in International Paper were trading one dollar higher than today at $31.67 an investor bought the same amount of call options expiring in July to buy calls expiring in January. The trade involved the $32 strike price in July and the $36 strike in January with the investor hoping for a steady climb in IP's shares in the meantime. At the time the trade cost the investor 79 cents to employ. However, since that time the trade has suffered with shares wilting to $30.65 causing a narrowing of the calendar spread to 56 cents and imposing losses on the weary trader. It appears as though this time around the investor is giving up on this trade.

APOL – Apollo Group Inc. – Ahead of a report outlining the treatment of students looking for government financial aid, options were active in for-profit provider Apollo. There was substantial speculation in its options with call buyers looking for a swift gain from a favorable decision. The June call series at the $44 strike saw volume of about 13,000 lots midweek and roughly matching volume after a lenient report removed pressure on Apollo whose share price surged by 10% to $46.57 by lunchtime in New York. Earlier the price rose to $48.19. Curiously it appears that some 13,000 call options changed hands to the 'ask' price at a $4.00 premium – substantial, although remember that these call options leapt in-to-the-money overnight offering significant intrinsic value. On Wednesday the same call options closed at a premium of just $1.00.

DHI – DR Horton Inc. – Despite a lackluster performance in the housing market, equally reflected in that of homebuilders' shares, one option investor appears to have made out well in what appear to be a closing transaction in DR Horton. The initial three-legged spread was placed on April 6 when shares in the builder closed at $11.49 and involved the purchase of vertical ratio spread with the lower leg in-the-money calls expiring November and the sale of out-of the-money puts. The investor paid a net 55 cents to buy 10,000 calls at the $11 strike, selling 15,000 calls at the $14 strike and sold 15,000 puts at the $9 strike. Having advanced by 40 cents to $11.89 the investor has been protected from the messy housing market by the fact that he selected the in-the-money call options. That aside, the timing of the initial transaction was pretty shrewd with investor turning bullish the day after DHI traded at its lowest point of this year so far. The trade appears to have been closed at an unadjusted net premium of 108 cents.

A Moody's rating agency warning over an albeit slim likelihood of a government default put government debt prices on the defensive and took away a slug of yesterday's gains. Traders attempted a rally for riskier assets ahead of the market opening on Thursday only to get beaten back by further worries arising over the economy. Factory orders fell harder than expected while in-line initial claims did little to steady nerves ahead of Friday's crucial employment report. On the basis of weakness within an earlier ADP survey of private employers many Wall Street houses have curbed their prediction for Friday's number. Bond prices eased on Thursday but waning confidence in the financial sector meant that bank issues were expelled from many investors' portfolios sending paper prices sharply lower.

Investment Grade –

Morgan Stanley (MS) – With $65mm of its January 2021 maturity on the loose on Thursday, paper issued by Wall Street banker Morgan Stanley had the dubious honor of being the most actively traded issue. Investors sold the 5.75% coupon-carrying paper leading to losses of $1.32 per $1,000 invested and driving the yield higher to 5.23%. Financial stocks were hit hard earlier in the week on fears that the economy is coming to a standstill and staged the worst performance in 10 months.

JPMorgan Chase & Co. (JPM) – The yield premium on JPMorgan's 10-year paper widened out by three basis points over comparable treasuries as its paper was heavily sold by investors. Around $50mm of its May 2021 issue changed hands with holders losing 88 cents per $1,000 bond as the price eased sending the yield higher by 10 basis points to 4.57%. To illustrate the reversal in sentiment taking place, the price of the bond is fast-approaching par having traded as high as 103.65 on Wednesday. Shares in JPMorgan fell by 0.7% to $41.47 leaving them at the weakest since December 21.

Bank of America Corp. (BAC) – Shares in Bank of America have been under constant pressure since February and in today's melee at $11.08 came within 17 cents or 1.5% of a 52-week low established in November. Its share price has since has since turned in to the green on the day as bargain hunters buy. Meanwhile its corporate paper was also under heavy pressure with investors ditching $43mm of its A2-rated May 2021 expiration driving the yield up to 5.08% compared to the 5% coupon it carries. The price slid $1.31 per $1,000 invested through par having traded to as high as 103.40 on Wednesday.

Time Warner Inc. (TWX) – Paper issued by cable and network entertainment provider Time Warner slumped Thursday with its 10-year maturity shedding $1.20 per $1,000 face value as dealers ditched $38mm of its March 2021 maturity. The yield on the paper rose to 4.51% from 4.45% on Wednesday.

Muni-Bond Corner –

Positive technicals dominate the Municipal market.  Municipal issuance is down approximately 50% YTD and there is a record reinvestment of bond redemptions expected this summer with some $48 billion principal payments due June 1st and $30 billion due July 1st.  The technical situation has been responsible for driving the market higher since April and the question is whether the rally has run its course will remain firm until August. Yesterday New York State Environmental Facilities Corp issued $521mm and yields dropped 6 basis points due to large investor interest.  Bonds were issued at 36 bps over the comparable AAA scale.

[setravis]

Tech Trader Daily...
June 1, 2011

Canaccord Genuity's Paul Mansky this afternoon writes that "now is the time" for Dell (DELL) to make a push into networking in a more concerted fashion, and that Brocade (BRCD) could be a target.

Dell owns three pieces of the emerging data center, storage, servers, and services, but aside from simple switching, it lacks a real computer networking offering.

There's an urgency to fill that gap, writes Mansky, as Dell's PC business is at the mercy of the tablet market's cannibalization of PCs. But Dell has had success cross-selling Ethernet switching. With a shelf registration for $3.5 billion in debt, filed today, and with $7 billion of net cash on the books, Dell can do a deal.

Mansky thinks Brocade could be the ticket. He has a Buy rating on Brocade shares, and a $10 price target. Brocade has 70% of the fibre channel storage networking market, which has a high return on investment and should be a cash cow for the next five years. The other likely candidate, Juniper Networks (JNPR), gets most of its revenue from carriers, not enterprise, and is therefore not as good a fit. (Not to mention Juniper has an $18 billion market cap, Brocade, just $3 billion.

Dell shares closed down 48 cents, or 3%, today at $15.60.
Day's Range: 6.89 - 7.27
52wk Range: 4.64 - 7.27
Volume: 56,561,732
Avg Vol (3m): 10,674,800
Market Cap: 3.36B
P/E (ttm): 33.86
EPS (ttm): 0.21
Div & Yield: N/A (N/A)

Technicals
Last Price Quote is:
8.12%above 13-day EMA
13.60%above 50-day EMA
RS Rating: 85