Friday Losers: Brocade, Dell, Red Robin Gourmet Burgers

David Sterman's picture

Friday, May 21, 2010 - 11:30am

by David Sterman

Among the biggest losers in Friday's early trading are Brocade (Nasdaq: BRCD), Dell (Nasdaq: DELL) and Red Robin Gourmet Burgers (Nasdaq: RRGB).

Top Percentage Losers -- Friday, May 21, 2010
Company Name (Ticker) Intra-Day Price Intra-Day
% Loss
52-Week High 52-Week Low
Red Robin (Nasdaq: RRGB) $19.81 -15.9% $29.10 $14.39
Brocade (Nasdaq: BRCD) $5.09 -13.4% $9.84 $4.99
Dell (Nasdaq: DELL) $13.50 -5.8% $17.52 $10.99
*Table includes companies with minimum market capitalizations of $200 million and three month trading volumes of at least 100,000 shares. All percentage returns are listed as of 11:15AM Eastern Standard Time. Click on ticker symbols for up-to-the-minute price quotes and percentage gain data.

Dell Slowly Improves

In early March, shares of Dell (Nasdaq: DELL) started to stage an impressive rally as investors grew to expect a healthy upturn in demand for tech equipment. But in recent weeks, the optimism evaporated on concerns that price pressures would limit profit growth. Dell confirmed that thesis Thursday evening, as profit margins lagged forecasts, pushing shares down nearly -6% in Friday trading. Shares have now come all the way back to where they were before this year's early March rally began.

Part of the weakness is attributable to management's predictions of steady -- but not robust -- growth to come. Management always downplays the forward view and never gives explicit sales or profit guidance, so investors should have never expected a bullish forecast from management to begin with.

Nevertheless, Dell's picture has materially brightened, even if gross margins remain under pressure. It's important to note that overall profits are still growing at healthy clip, as rising sales offset the minor margin compression. Lastly, most corporations have yet to embark on a Windows upgrade cycle, which should begin within the next few quarters, assuming the economy doesn't slip back into recession.

Action to Take -->
It's hard to understand why investors are dumping a stock that sells for less than seven times 2011 EBITDA/EV, and whose cash balance is the equivalent of half its market value (when projected fiscal 2011 free cash flow is incorporated into the cash position). Dell is indeed turning around, despite the disappointing stock chart. This stock looks set for a solid rebound once the current round of hand-wringing over tech spending has ended.

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Brocade's Management Loses Trust

Judging by the -13% pummeling its shares received on Friday, you would think Brocade Communications (Nasdaq: BRCD) must have delivered a lousy fiscal second quarter. Actually, the quarter was OK, with a mixed bag of good news (the bottom-line) and bad news (the top line). Instead, the sell-off has everything to do with confidence in management. Only recently, management had spoken of strength in its high-margin Storage Area Network (SAN) division. But revenues at the SAN division missed forecasts by around 10%. Conversely, the company's lower-margin Ethernet business performed well ahead of expectations. Those trends are the reverse of just a quarter ago. Investors seem to be feeling that management has a lack of credibility in terms of forecasting and consistent execution.

A quick survey of analysts' reports implies that Brocade's quarterly results weren't all that disappointing when all the factors are taken into account. Several analysts reiterated “Buy” ratings with price targets above $7 a share. Shares now trade for less than 10 times projected fiscal 2010 profits.

Action to Take --> Even though shares are cheap and the sell-off appears overdone, investors should tread very lightly with tech stocks right now as any news -- good or bad -- is being viewed with a gimlet eye. Goldman Sachs's (NYSE: GS) downgrade of Brocade typifies investor sentiment: shares may be cheap, but they lack any near-term catalysts to bring in buyers. Keep this name on your watch list. It could prove to be appealing once tech stocks start to rotate back into favor.

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Red Robin's Struggles Cause Shares to Lose Big

Red Robin Gourmet Burgers' (Nasdaq: RRGB) shares are down nearly -16%. The fast-food chain missed sales estimates by a small margin, and took down full-year guidance. The company actually boosted advertising and promotion efforts in the quarter, and the fact that sales weren't higher is a bad sign. It is possible that if management had not spent heavily to drive store traffic, then the sales shortfall could have been even greater. The higher ad spending also led to a sharper profit shortfall: EPS of $0.14 was roughly half the consensus forecast. (A one-time gain gives the appearance that Red Robin actually exceeded forecasts).

With the exception of McDonald's (NYSE: MCD), many burger chains have been struggling to boost sales. Many thought they would find more favor among cash-strapped consumers, but those consumers may increasingly be preparing their own meals.

Action to Take --> The bottom line is a much more important factor here than the top line. As long as management needs to keep spending heavily to lure customers, profit margins will remain subpar. Despite today's sharp sell-off, shares are still no bargain at more than 16 times projected 2010 profits. Instead, keep an eye on Wendy's (NYSE: WEN), trading at new lows for the year on Friday, but better-positioned to generate meaningful profit growth once sales trends reverse.

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.