Merrill Not Thrilled with ELX (or MRVL)- HBA pressure
Emulex held its analyst day yesterday in Costa Mesa, CA. The company provided no change to guidance, and spent the majority of the meeting focusing on technical and competitive strengths. - The company discussed its new Thor integrated chip, its InSpeed technology (acquired through the Vixel acquisition), and it`s move to address the SMB FC market with the new LP101 HBA. - We are concerned about potential cannibalization of the company`s high-end HBAs by its own lower priced adapters, but we recognize that such adapters will enable the company to better penetrate the SMB market. - Our Buy rating on shares of Emulex remains unchanged. Our DCF analysis leads to a 12-month price objective of $36. A price of $36 by the end of 2004 would result in 27x our C2005 EPS estimate of $1.36. We believe that 27x is a reasonable multiple to pay for Emulex in light of our estimated 20%+ yr.-yr. top line growth rate and near-term opportunity for additional margin expansion (particularly when Thor ramps). Emulex currently trades at less than 20x our C2005 EPS estimate. - Risks to our price objective include: 1.) Losing share to QLogic at HP, 2.) Slower migration than expected toward implementing SANs, 3.) EMC (and other OEMs) succeeding in extracting lower prices from Emulex, 4.) Accelerated move to chip-level solutions from board-level solutions, and 5.) Accelerated move by customers to use IP storage (versus FC) for SANs.
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