Brocade Communication Systems (BRCD) is our hot stock of the week and earns an Attractive rating. Brocade, a provider of storage area networking and Internet protocol networking solutions, had a very impressive 2014. The stock ended the year up 36%, and for many reasons, we feel Brocade Communications could repeat in 2015.
Since 2009, Brocade has grown after-tax profit (NOPAT) by 25% compounded annually. The company has also increased its return on invested capital (ROIC) from 5% in 2009 to 14% last year. Brocade’s revenue in 2014 was slightly lower than in 2013, but thanks to effective cost control measures gross margins on each of the company’s product segments reached new highs in 2014. This cost efficiency has allowed Brocade to continually grow NOPAT. Brocade management has noted that on top of increasing cost controls, they are focusing on great growth potential in Asia, Eastern Europe, and South America.
Despite Brocade’s impressive future prospects and its history of NOPAT and ROIC growth, BRCD is a cheap stock. At its current price of ~$12/share, Brocade Communications has a price to economic book value (PEBV) ratio of 1.2. This ratio implies the market expects Brocade to only grow NOPAT by 20% from current levels over the rest of the company’s lifetime. While 20% NOPAT growth is nothing to sneeze at, the company has grown faster than this each year over the past five years. If we give Brocade credit for only 15% compounded annual NOPAT growth for the next 10 years, the stock is worth $21/share today –– a 75% upside.
Kyle Guske II contributed to this report.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.