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Merrill on Emulex 8/9/02: Margins beat mixed outlook

08/09/02 06:59 AM
Source: Merrill Lynch

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Emulex (ELX, $23.61, D-2-1-9)

"Better Gross Margins Overshadowed Mixed Outlook"

Volatility risk: High

Raise Jun03e from $0.70 to $0.73; Market Cap: $1.997 bn

Emulex reported 4Q02 revenue and EPS of $70.2 million and $0.16, in-line with our estimates. We are satisfied with the results given the tough-spending environment. We maintain our BUY rating.

Management offered tepid guidance for 1Q03, echoing what we've been hearing about visibility being poor. FC revenue was flat ($68.3 million) Q/Q, while FC units increased 13%. We are reducing our revenue estimates for 1Q03 and FY03 from $74 million & $334 million to $71 million and $312 million.

We are increasing our EPS estimates for 1Q03 and FY03 due to sustainable increases in gross margin and a reduction in the effective tax rate. Our 1Q03 & FY03 EPS estimates go from $0.16 & $0.70 to $0.17 and $0.73

The stock has gone from around $30 three months ago to around $23 we believe due to economic worries. We believe the stock could be weak today given its outlook, but expect the stock to move up over the intermediate-term as SANs continue strong through the remainder of the year.

Our new 3-year PEG model shows an implied price of $33.80, down from $37.13. On a PEG basis the stock is currently trading at less than 1x our long term growth estimate of 29%. Risks include the continuation of weak IT spending and competition.

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