Staring Down This Downgrade
SonicWALL (SNWL) shares are trading about 5% lower this morning to $6.36. RBC Capital Markets' analyst lowered the target price on the network security concern to $8 a share from $10 a share and said investors with a near-term focus may want to take a profit in SonicWALL because the company is likely to report earnings of three cents a share on $34.5 million in sales, which is at the midpoint of the company's third-quarter guidance range. We aren't taking any action on this call, but wanted to give you readers our interpretation.
First off, we won't be too disappointed if the company comes in at the middle of the range. It is actually comforting to own a tech stock that is staying within its guidance range, especially in the context of those larger-cap tech stocks out there that can't hit their numbers at all. SonicWALL's consistency and earnings transparency is one of the reasons we like the stock and believe it will trade at a premium earnings multiple.
We are encouraged to see the analysts become a little more conservative heading into the quarterly report. Remember that we only bought SonicWALL after the company failed to live up to overly optimistic estimates last quarter and subsequently suffered a 30% hit to its share price. Even after today's decline we are up 14% on this 800-share position.
We continue to believe the stock is too cheap based on the 18-cent estimates being used for 2005. Seventeen times next year's earnings is too cheap for a double-digit top line grower with a large market potential. Especially when you back out the $3.40 a share the company has in cash.
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