The Good and the Bad (original) (raw)

Sun Microsystems (SUNW) and Hudson City Bancorp (HCBK) reported earnings after the close Tuesday, and we want to review their results for you. We are taking no action in this Alert.

Sun reported fiscal third-quarter revenue of 3.28billionandearningspershareof1cent.Earningswereinlinewithestimates,butrevenuefellshortoftheconsensusforecastof3.28 billion and earnings per share of 1 cent. Earnings were in line with estimates, but revenue fell short of the consensus forecast of 3.28billionandearningspershareof1cent.Earningswereinlinewithestimates,butrevenuefellshortoftheconsensusforecastof3.42 billion. Sun also said that its fourth-quarter revenue would fall short of estimates. Shares are down about 9% today at $5.36.

The negatives on the call include a slight decline in backlog to $975 million, a slowdown in U.S. revenue in March and softness in Sun's consumer systems and storage business. The positives include an increase in gross margins of 250 basis points to 44.5%, lower inventory, an increase in order bookings, and management's reiteration of guidance for operating margins of 4% in fiscal 2007 and 10% in fiscal 2008. Overall, however, the quarter wasn't pretty.

Sun is in the process of restructuring, and the near-term picture is cloudy following the disappointing results. However, our long-term thesis remains intact. New products are set to hit the market in the coming months, and we believe management remains committed to cutting costs and delivering on its targets. Despite the latest results, we are maintaining our One rating.

As for Hudson City, the bank reported first-quarter results of 13 cents a share, which was in line with estimates. Shares are current trading flat at $13.37, but traded higher in the premarket because margin shrinkage was less than expected and net interest income was higher than forecasts.

Hudson said its net interest margin was 1.7%, declining only 8 basis points from last year's comparable period. Last quarter, the net interest margin fell 51 basis points from its comparable period, and so the latest figures indicate margin compression is easing. Due to the negative yield curve, margins were expected to decline for the quarter.

Other highlights include net interest income of 157.7million,higherthantheconsensusforecastof157.7 million, higher than the consensus forecast of 157.7million,higherthantheconsensusforecastof154.2 million, and the company's purchase of 11.2 million shares last quarter at an average price of $13.59. Also, Hudson increased its number of branches by 23% in 2006 and expects to add more branches in 2007.

As we have mentioned in past Alerts, Hudson has no exposure to the subprime market or riskier loan products such as ARM loans. Therefore, the bank has been able to avoid the risks related to the increase in foreclosures and payment defaults, which have hurt many aggressive lenders.

In addition, Hudson's solid business model could draw attention from a larger competitor. And otherwise, the company's outlook looks pretty solid with the Federal Reserve likely to begin easing rates in early 2008, and we maintain our One rating on Hudson.

Frank Curzio is a research associate at TheStreet.com.

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