Sell-Side Fêtes Foundry

How about those sell-side analysts? Now that Foundry Networks Inc.'s (Nasdaq: FDRY) stock has risen fourfold over the past six months, they've perked up and are issuing positive reviews.

But investors might be wondering if this bandwagon momentum is coming a bit too late. After all, buzz that Foundry's fortunes were turning first fired up early this year, when the stock was still trading in the single digits (see Foundry's Revenue: Rising Again?).

The positive chatter surrounding the company has helped boost its share price by $1.35 (6.6%) to a 52-week high of over $22.12 at close of trading yesterday. In early trading today, shares were slightly down $0.43 (1.94%) to $21.69.

On Thursday, SoundView Technology Group raised its investment rating for Foundry to "outperform" from "neutral," based on increased confidence in the company's federal government business. Today, CE Unterberg Towbin reiterated its "Buy" rating on the company and increased its 2004 earnings estimate from $406 million to $418 million. It also increased its 12- to 24-month price target from a range of $18-$20 to $27 per share.

"Foundry continues to execute well ahead of its peers, and we believe, across improving industry fundamentals, the company may be well-positioned from its broadening customer and product base," wrote Unterberg analyst Mark Sue in a note this morning. "We also look for the company to increase its sales and marketing efforts as it looks to scale revenues beyond $100 million per quarter."

Analysts expect Foundry to benefit from a flush of spending from its federal government contracts this quarter. Traditionally, September marks the end of the government's fiscal year, and this has provided a boost to equipment companies with strong federal channels. With Foundry now getting about 30 percent of its business from the federal government, this should significantly impact the company's quarter (see Foundry Gets a Fed Boost).

Foundry's federal business is just one of many positive chips falling into place for the company. It has steadily increased revenue quarter-over-quarter: In the second quarter of 2003, it reported revenues of $95.7 million, up from $91.1 in the previous term (see Foundry Q2 Revenues Increase). Analysts say the company is poised to continue this upward trend.

Sue says continued demand for the company's family of Layer-3 switches and a new upgrade cycle among existing customers will support growth into the fourth quarter. The company also continues to hold a leading position in higher-margin 10-Gbit/s Ethernet products. With per-port prices on 10-Gbit/s Ethernet dropping from about $42,000 last year to about $12,000 today, demand is picking up, particularly among service providers. Foundry, which once generated the majority of its business from service provider sales, is well-positioned to sell into this market, says Sue.

Foundry's contracts have also swelled to an average of $100,000 to $200,000, says Sue. He believes this momentum will continue for the rest of this year.

Analysts' upbeat predictions for Foundry are supported by reports from the company's largest competitor, Cisco Systems Inc. (Nasdaq: CSCO). Yesterday, Cisco CEO John Chambers told investors that Cisco's August sales were stronger than expected, lending credence to the view that corporate spending on information technology is recovering.

— Marguerite Reardon, Senior Editor, Light Reading

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