McNealy Out at Sun Micro

Shares of Sun Microsystems (SUNW) opened up more than 4% on Tuesday after CEO Scott McNealy announced his resignation last night. There is little doubt that new blood at the helm of the once high flying tech company is a good step for the company, but is SUNW stock a good buy?

Despite a huge cash hoard, the SUNW shares have been stagnant as financial results have left much to be desired. The main thing holding back the stock has been a lack of profits. The company’s cost structure is so bloated that even with billions in revenue, they aren’t making a dime. The strong balance sheet, coupled with an attractive price-to-sales ratio has gotten many value investors to bite in recent years, but they have little in the way of profit to show for it.

Without profits, investors can’t assign a multiple to earnings. Even if the company were able to swing earnings of 10 or 20 cents per share, the stock doesn’t look cheap. A 16 or 18 P/E on even $0.25 of EPS and you get a share price lower than it is today. It is possible that a new CEO can turn the company around, but until consistent profitability is demonstrated, Sun Micro shares will be laggards.

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One Thought on “McNealy Out at Sun Micro

  1. javasoy on April 26, 2006 at 6:37 PM said:

    turns out the great MSFT killer, Linux, is a SUNW killer. You can say Scott took the gun, aimed at his feet, and pulled the trigger.

    It didn’t help that SUNW poured millions into developing Java, only didn’t know how to profit from it. There is hope though. They bough SeeBeyond, which gives them a chance to fight in the software integration play. Still, it’s probably too little too late. With Oracle completing its Fusion project, going head to head w/ SAP, there is little room for much smaller player; let alone SeeBeyond was bleeding red before it got bought by SUNW.

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