Sun (SUNW) Shines - our stock to watch
After countless years in the red, has Sun Microsystems (SUNW) found a way to make money again? After its latest earnings, one could say the company is certainly heading in the right direction. Sun reported second-quarter profit of $126 million. This is a complete reversal from a year ago, where SUNW lost $223 million (AP). A smaller company compared to its hay days, SUNW appears to be on to something.
Now that Scott McNealy is no longer running the company, SUNW might have found a new savor in Jonathan Schwartz. After taking over SUNW, Mr. Schwartz drastically cut cost and form new partnerships that Mr. McNealy would never consider. The idea of partnering with Intel or Microsoft would never have been possible with McNealy at the helm. Pride would have gotten in the way. Despite the struggling business, McNealy was also not a big fan of cutting staff. As a founder of the Sun, McNealy had too much emotional attachment and created too many enemies to make any partnership effective.
Mr. Schwartz appears to be a different breed. Without the emotional baggage, his team appears to be taking the right steps to position SUNW into a UNIX power house once again. If anyone is familiar with the Solaris Operating System, it was one of the most popular OS in the Enterprise as it was more stable than Windows. As Enterprises opted to go with Linux and run it on less expensive Intel based box that cost much less than a Sun box, Sun's profit took a dive. Moreover, in some cases, the performances of the Intel based machine were just as fast. The migration to Intel based boxed continued after the dot com bust and SUNW was left with very little to work with. The company was left for dead. Thanks to a solid second quarter numbers, there's now sign of life.
SUNW has now embraced Intel as well as new approaches to grow the company; this strategy appears to be working. Through careful cost management and laser focus sale strategy, SUNW is starting to see reap the benefits. Trading a little over $6.00 per share, we believed the market is a little too excited and the stock is overvalued. However, as of today, SUNW will be added to our watch list. Our target entry price is $5.00 per share. Don’t forget KKR has also invested in SUNW; this raises the possibility that SUNW could be taken private.
