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Sun Microsystems Unlikely To Shine

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Fourth-quarter results less than stellar.

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Sun Microsystems (JAVA) booked a fourth-quarter gain of $0.35 per share, excluding items. While some might regard this as good news (preliminary results disseminated by the company called for earnings of $0.25 to 35 cents per share), Sun Micro bulls shouldn't celebrate just yet.
Here's why: Gross margins came in at 44.3% for the period - a drop of almost 300 basis points from the roughly 47.2% gross margin posted in the comparable period last year. It was also a sharp drop from the 46.5% full-year gross margin. A company facing this much pressure is going to have a hard time producing solid earnings.
Sun's CFO, Mike Lehman, offered more bad news: Lehman said he didn't expect the company "to post a net profit in the first quarter, as it must take a $100 million restructuring charge for previously announced layoffs." Analysts are currently looking for the company to post an $0.11 per share profit in the period.
CEO Jonathan Schwartz added that Sun doesn't "expect a lot in the U.S., even in the second half of the year." According to the company's last 10-K, it garnered 41% of its revenue from the U.S. in 2007 - which doesn't bode well for 2009's earnings. As a result, we could see analysts reel in their 2009 estimates, currently at $0.97 per share.
The company reported that it spent some $464 million to buy back more than 35 million shares of its stock. That's a lot of money - and it could point to better news ahead. In addition, according to its earnings release, the board "authorized an additional repurchase of up to $1 billion of the company's outstanding common shares." (Sun's available cash totaled $2.2 billion at the end of June.) I think that indicates the company believes its shares are undervalued.

The repurchase effort could also soften what could be a very harsh tax-loss selling season for the stock.
Of course, it'd be nice to see more insiders belly up to the bar and buy shares for their personal accounts. For the record, insider transaction data reveals that Peter Currie, a director, purchased 25,000 shares at $17.18 to $17.22 back in February.
In short, Sun's fourth-quarter numbers weren't stellar, and I'm not too encouraged by its outlook for 2009. Writing the stock off entirely at this point, however, would be a bit premature - and the firm's share repurchasing effort can't be dismissed.
Sun closed at $9.32, down $1.31 or 12.32%.
No positions in stocks mentioned.

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