RBC Capital Upgrades Brocade (BRCD) to Outperform Amid Potential Takeover
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RBC Capital upgraded Brocade (NASDAQ: BRCD) from Sector Perform to Outperform with a price target of $14.00 (from $11.00) following reports it is in advanced talks to sell itself to Broadcom (NASDAQ: AVGO).
Analyst Mitch Steves commented, "We think that Brocade makes sense as a strategic asset to the right operator or CEO (Hock Tan as a solid operator), which would lead to mid-single-digit accretion for the acquirer (35%+ operating margin potential). M&A in the space (most notably ELX) should help put a valuation floor; in addition, with Brocade’s operating margin in the 20s today we see the asset working up to the mid 30s. Beyond the M&A valuation floor, we think Brocade is continuing to gain share within the IP networking segment post Ruckus as it continues to attack and gain share from the federal vertical. This organic revenue growth and EPS potential could lead to $1.10+ in EPS in FY17E and we think this would lead to multiple expansion as well (11x average could increase to 12-14x). Net/net: Combining the organic potential with M&A valuation floor, we are upgrading shares to Outperform and $14 target (from $11)."
Shares of Brocade closed at $8.69 yesterday.
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