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UPDATE: Brocade Down On Summit Research Cut

Luke Jacobi

Shares of Brocade Communication Systems (NASDAQ: BRCD) are down 1.92 percent Monday after Summit Research downgraded the company from Buy to Sell. The price target was cut from $12 to $7, almost 25 percent below the current share price.

Diminishing demand for the company’s fiber channel business, which makes up more than 70 percent of profit, is the key reason for concern. The report states, “The decline seems to be accelerating to mid-to-high single digits, up from flat-to-low single digits prior to this quarter. We see further evidence from other FC players such as Emulex (ELX, HOLD), whose management reported a 10-12% decline in its FC business, down from the prior quarter's 3-5% decline."

Summit also points out that the fiber channel business is significantly more profitable than broadband. "Every $1 decline in FC revenue would need $1.15 in Ethernet revenue to maintain EPS."

EPS could be maintained despite dropping sales with share buy backs, but Summit writes, "the company would need solid cash flow to fund them (cash flow that is mostly driven by FC sales). Hence, we believe funding buybacks organically could prove difficult."

The $7.00 price target is derived from nine times forward EPS of $0.76. Shares of Brocade are down 1.92 percent to $8.70 mid afternoon.

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