Foundry Networks (FDRY)

Foundry Networks (FDRY) was downgraded by Robert Baird this morning based on valuation and increased competition. Let's look at the fundamental picture. Hewlett Packard has introduced its own high end Ethernet switch and this could potentially affect the sourcing relationship that FDRY currently enjoys with Hewlett. Similarly, Alcatel and Nortel are becoming more formidable competitors.

Wall Street has estimated growth for FDRY at a median of 17.5% versus the calculated historical sustainable growth rate of 6.6%.

Unlike most of its confreres, FDRY has generated FCF since 2000 totalling almost $400 million in that time. Common stock issuance has totalled $125 million which was used to fund its acquisitions. There is almost $5.00 per share in cash.

Return on invested capital peaked in 2003 at over 35% but has headed down to its current 8%, which is still fairly lofty by most industry standards. However, the potential competitive pressure on margins should keep a lid on returns for some time.

Though the company is noted for its technological leadership and its strong governmental relationships, the sustainability of its competitive advantage period is moot. The stock is currently trading at 22.6 times EV/EBITDA which seems to suggest a far more robust future than I can comfortably see. In the last six months, insiders have sold about $1.6 million of stock.