Brocade Communications Systems, Inc. – Value Analysis (NASDAQ:BRCD) : August 1, 2017

Capitalcube gives Brocade Communications Systems, Inc. a score of 50.

Our analysis is based on comparing Brocade Communications Systems, Inc. with the following peers – NetApp, Inc., Quantum Corporation, HP Inc., Western Digital Corporation, International Business Machines Corporation, Cisco Systems, Inc. and Juniper Networks, Inc. (NTAP-US, QTM-US, HPQ-US, WDC-US, IBM-US, CSCO-US and JNPR-US).

Investment Outlook

Brocade Communications Systems, Inc. has a fundamental score of 50 and has a relative valuation of OVERVALUED.

Fundamental Score

Access our research and ratings on Brocade Communications Systems, Inc.

Company Overview

  • Compared to peers, relative underperformance last month is down from a median performance last year.
  • It’s current Price/Book of 2.01 is about median in its peer group.
  • The market expects faster earnings growth from BRCD-US than from its peers and also a turnaround in its current ROE.
  • BRCD-US has relatively low profit margins and median asset efficiency.
  • Changes in annual revenues (relative to peers) are better than the change in its earnings (relative to peers), implying the company is focused more on revenues.
  • Over the last five years, BRCD-US‘s return on assets has declined from about median to less than the median among its peers suggesting that the company’s historical competitiveness in operations is slipping away.
  • The company’s median gross margin and relatively low pre-tax margin suggest high operating costs versus peers.
  • Compared with the peers chosen, BRCD-US has had faster revenue growth in prior years and a current P/E ratio that suggests faster growth in the future suggesting superior growth expectations.
  • The company is likely overinvesting in a business with only median returns.
  • BRCD-US does not seem to have the flexibility to raise more debt.

Access our research and ratings on Brocade Communications Systems, Inc.

Leverage & Liquidity

BRCD-US does not seem able to raise more debt easily.

  • BRCD-US‘s debt at 28.67% of its enterprise value compared to an overall benchmark of 25% (Note: The peer median is currently 25.82%), and interest coverage level of 2.66x, would make major new borrowings difficult.
  • All 7 peers for the company have an outstanding debt balance.

BRCD-US has moved towards a median liquidity and leverage from an Some Capacity profile at the recent year-end.

  • BRCD-US‘s interest coverage is its lowest relative to the last five years and compares to a high of 12.79x in 2014.
  • Though its interest coverage decreased to 2.66x from 6.86x (in 2016), its peer median remained relatively stable during this period at 11.00x.
  • Interest coverage fell 4.00 points relative to peers.
  • BRCD-US‘s debt-EV has declined 12.71 percentage points from last year’s high but remains above its five-year average debt-EV of 24.70.
  • The decrease in its debt-EV to 28.67% from 41.38% (in 2016) was also accompanied by a decrease in its peer median during this period to 25.82% from 26.82%.
  • Relative to peers, debt-EV fell 11.71 percentage points.

Access the detailed analysis for Brocade Communications Systems, Inc.

Key Liquidity Items

Company Debt/Enterprise Value (%) Current Ratio Interest Coverage (x) Cash Flow To Total Debt (%)
NetApp, Inc. 26.82 1.5 13.48 45
Quantum Corporation 36.52 0.82 1.8 17.03
HP Inc. 21.13 0.98 12.78 48.62
Western Digital Corporation N/A 2.55 1.84 22.2
International Business Machines Corporation 25.82 1.25 15.99 34.57
Cisco Systems, Inc. 24.09 3.52 15.9 39.32
Juniper Networks, Inc. 20.72 2.48 9.22 51.25
Brocade Communications Systems, Inc. 28.67 2.48 2.66 27.59
Peer Median 25.82 1.99 11 36.95
Best In Class 20.72 3.52 15.99 51.25

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Company Profile

Brocade Communications Systems, Inc. engages in the provision of innovative network solutions. It supplies networking hardware and software, including Storage Area Networking solutions and Internet Protocol networking solutions for businesses and organizations worldwide. It operates through the following segments: Storage Area Networking Products, Internet Protocol Networking Products, and Global Services. The Storage Area Networking Products segments include infrastructure products and solutions that assist customers in the development and delivery of storage and server consolidation, disaster recovery and data security, and in meeting compliance issues regarding data management. These products are used to build storage area networks and are generally used in conjunction with servers and storage subsystems, Storage Area Networking interconnection components such as host bus adapters and server and storage management software applications and tools. The Internet Protocol Networking segments products include Layer 2 and Layer 3 Ethernet switches and routers that are designed to connect users over private and public networks, including local area, metro, and within & across global data centers. Global Services segment include break and fix maintenance, installation, consulting, network management and software maintenance, and post-contract customer support revenue. Brocade Communications Systems was founded by Paul R. Bonderson, Jr., Kumar Malavalli and Seth D. Nieman on August 24, 1995 and is headquartered in San Jose, CA.

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