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Inside Wall Street


Who Has Designs on Brocade?

Storage technology companies have been big winners this year, their stocks buoyed by the battle for Data Domain, which EMC (EMC), the No. 1 maker of storage computers, acquired in July for $2.1 billion after outbidding NetApp (NTAP). "Storage is still a growth industry, and this deal signals more consolidation ahead," says Chris Haroun, CEO of Haroun Capital Management, which owns shares. He believes one company that is an attractive target is Brocade Communications (BRCD), which makes data storage networking products for the high-end Ethernet market, where it has a 70% share. Brocade would make a great acquisition for IBM (IBM) or Hewlett-Packard (HPQ), especially since Cisco Systems (CSCO), with 65% of the lower-end Ethernet market, "has moved recently to compete with the two companies in the server market," says Haroun. IBM, EMC, and HP account for 65% of Brocade's sales. Cisco is losing share in Brocade's core market, he notes. Brocade stock has bolted to 7.89, up from a 52-week low of 4.48 on Mar. 3, but it is still cheap, says Haroun, who figures it is worth 12.

Brian Marshall of BroadpointAmTech says it's unusual these days to find an opportunity like Brocade, with a projected 2009 revenue growth of 29% and operating margin of 21%. He rates the stock a buy with a target of 10.25.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Essex, a REIT to Remember

Is it time to venture back into real estate investment trusts (REITs)? They're still unpopular because of the housing slump, but some, such as Essex Property Trust (ESS), "now represent attractive value," says Jay Leupp, CEO of Grubb & Ellis AGA Realty Income Fund (GBEIX), which owns shares. REIT stocks have been "bumping along the bottom for years [but] paying generous dividends," he notes.

Essex owns 134 multi-family properties in Sou-thern California and the Pacific Northwest. With its strong balance sheet, Essex has been raising dividends for several years; its current yield is 6.7%, notes Leupp. He figures the stock, now at 60.67, will be worth 80 in a year. It hit 129 in 2008.

Michael Salinsky of RBC Capital Markets rates Essex outperform. He says it's well positioned to weather the downturn and take advantage of opportunities in coming years.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Slimmed Down at Cardinal Health

Some pros are starting to favor a downsized Cardinal Health (CAH), a major wholesale distributor of medical and surgical supplies, all set to spin off its lucrative unit that makes such products as surgical instruments.

Charles Rhyee of Oppenheimer (OPY), who rates Cardinal outperform, expects the spin-off will boost long-term growth: It would let Cardinal focus on its distribution business, which accounts for 70% of earnings. That change will cut fiscal 2010 profits to $3.23 a share, but they should rebound to $3.52 in 2011, says Rhyee.

The stock is at 30.38, down from 36 in May. On a sum-of-the-parts valuation, he puts its worth at 40. Richard Close of Jefferies says Cardinal's new focus on expanding its distribution business rather than just using it as a cash cow should help drive long-term shareholder returns. He rates the stock a buy.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.


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