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.