Tech stocks have rallied nicely since the November 2nd presidential election, presenting some attractive exit points for certain stocks. Network computing giant Sun Microsystems (SUNW) appears to fall into that category. Over the last three months, SUNW shares have jumped more than 40 percent from under $4.00, hitting a high of $5.60 each this past week. Looking at the company’s current valuation, it’s difficult to make the case that the stock should continue its ascent. Wall Street analysts seem to agree. While I usually will opt not to side with the consensus view, the current ratio of buy, hold, and sell ratings stands at 3/15/6.
Despite a healthy balance sheet with more than $3.5 billion in cash (approximately $1 per share), Sun’s enterprise value-to-earnings ratio looks insanely high, mainly because the company is having trouble turning more than a slight profit on its nearly $12 billion in annual sales. For fiscal 2005 (ending in June), SUNW is expected to earn $0.06 per share or $200 million in profit. This 1.7 percent net margin gives the stock a P/E of 76x, even if we use the company’s enterprise value ($15.2 billion) instead of its entire market cap ($17.5 billion).
Even if we were to assume that Sun Micro could raise those margins substantially through cost-cutting, it is still very hard to justify the stock’s current valuation. Estimates for fiscal 2006 stand at $0.12 in earnings per share (3.4% margins on $12 billion in sales) give SUNW an enterprise value-to-earnings multiple of 38x. Assuming an overly bullish 5% margin gets you to $0.20 in EPS, but then the multiple only shrinks to 25x, which seems about as high as Wall Street could rationally justify.
All in all, investors seeing value in the $5+ share price of this former tech bellwether may well be being influenced by the share price, rather than actual “financial value.”