A Buyback Boost for Sun Micro

Shares of the IT outfit moved higher Thursday after it announced a $3 billion stock repurchase plan

by Ben Steverman

One-time highflier Sun Microsystems (SUNW) has seen its shares trade in the low to mid-single digits for the past several years. In its latest effort to goose its stock price as it recovers from the tech bust, the company announced plans May 17 to buy back $3 billion in stock.

Standard & Poor's equity analyst Jawahar Hingorani called the buyback announcement a "confidence-boosting" measure. Sun is in the middle of what is expected to be its first profitable year since 2001. The firm has cut costs and restructured as demand for its products shrank for several years. Sun makes computer hardware like servers and work stations and invented the programming language Java.

Sun's stock hit a 52-week high of $6.78 more than three months ago, but had retreated since then. It closed at $5.12 on May 16. On May 17, it was up 4.5% to $5.34 at midday.

The stock buyback "reflects [the board's] confidence in the continued growth of Sun's business," chief financial officer Mike Lehman said in a statement. The company said the program is designed to increase shareholder value and offset the dilutive effect of its equity compensation programs. It has no expiration date, and Sun will cancel a previous program launched in 2001 but never completed.

Stock buybacks are a popular tool for corporations looking to use cash on their balance sheets (see BusinessWeek.com, 5/17/07, "Where the Big Buybacks Are").

Pacific Crest Securities analyst Brent Bracelin said Sun spent the last year talking about ways to use its cash. It has more than $5 billion in cash and marketable debt securities and it generates about $1 billion in cash each year, Bracelin said. "That still leaves ample room for them to go out and look at acquisitions," he said. Bracelin expects Sun to buy up small firms to get access to good technology, not large acquisitions.

The buyback isn't expected to interfere with other priorities. Sun already spend lavishly on research and development, almost $2 billion per year on average.

S&P's Hingorani said the buyback helps show that Sun's restructuring efforts are on track. Sun's revenues declined almost 40% between 2001 and 2005. Restructuring is designed to cut costs by reducing the number of employees and facilities. Those efforts have cost money, and Hingorani said the buyback is a sign there are fewer restructuring charges to come.

Pacific Crest's Bracelin said cost-cutting initiatives, along with a new product cycle, bode well for Sun. The trends "position them well to sustain profitability," he said. (Pacific Crest makes a market in Sun stock.) Standard & Poors expects earning per share of 5 cents in 2007 and 10 cents for 2008.

Earlier this year private equity firm Kohlberg Kravis Roberts & Co. invested $700 million in Sun through convertible senior notes. "We view this news positively, and think it helps validate [Sun's] long-term growth strategy," S&P's Hingorani wrote in a recent report.

(S&P, like BusinessWeek.com, is a unit of the McGraw-Hill Cos.)

Steverman is a reporter for BusinessWeek's Investing channel.