News Analysis date published New: 
Wednesday, September 12, 2012 - 09:20
New Date created: 
Friday, September 21, 2012 - 02:43
New Date last updated: 
Wednesday, September 12, 2012 - 09:20

Buy or Sell? Wednesday's Losers: GCOM, XRTX

Wednesday, September 12, 2012 - 9:20am

Among the biggest losers in Wednesday's early trading are Globecomm Systems (Nasdaq: GCOM) and Xyratex (Nasdaq: XRTX).

As the need to quickly access ever-rising streams of corporate data becomes a central mission, a number of companies providing data storage have been able to generate very impressive growth. For example, Fusion IO (NYSE: FIO), which I profiled here, is on track to boost sales 45% in fiscal (June) 2013 to around $520 million. But for the number of winners this sector is producing, there are also losers.

U.K's Xyratex, which helps make enclosures and other equipment for some leading data storage providers, is decidedly not part of that upswing. The company just announced that third-quarter sales (ended August) were likely around $275 million. That's far below the previously guided range of $313 million to $373 million. That's also well below the $362 million garnered in the year-ago quarter.

The company noted that major customers (likely including top customer NetApp (Nasdaq: NTAP)) have been reducing orders, right at a time when the broader industry is seeing a big spike in orders. According to analysts at Cantor Fitzgerald, NetApp may be giving more business to Jabil Circuit (NYSE: JBL), and less business to Xyratex.

Frankly, the 11% drop in this stock today doesn’t look to be deep enough. Yes, the company will still likely earn at least $1.50 a share in fiscal (November) 2012, (compared to the current forecast of $1.78 a share). Yet by fiscal 2013, earnings per share might be sinking quickly. So don’t be lured in to what looks like a value trap. This is a "don’t touch" stock until demand has at least stabilized. For now, management only notes that the current quarter looks pretty dismal as well, likely setting the stage for a very disappointing fiscal 2013.

The early signs of a smaller defense department
Shares of satellite communications firm Globecomm Systems are losing more than 19% today as the company warns that revenues from Department of Defense (DoD) contracts are likely to shrink in the quarters ahead. Larger defense contractors, which operate a range of long-term contracts, aren't yet seeing the impact of a budget-constrained DoD, but smaller vendors, such as Globecomm, surely are.

Some analysts suggest that the near-term DoD slowdown will be temporary, and once steps are taken to re-write the policies associated with the looming fiscal cliff, then the DoD will loosen up its purse strings. Don't you believe it. It is almost impossible to see how the DoD will avoid the cuts that many other sectors of government will have to absorb in coming years. So Globecomm's warning is more of a reflection of the "new normal" and not merely a 2012 aberration.

Action to Take --> Both of these stocks are taking a big hit today, though they could keep on dropping as their key investors start to unwind their positions in coming days. These kinds of stocks are only appealing when they appear to have hit bottom in terms of forward revenue and profit estimates. That cycle has yet to play out.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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