Sycamore Networks -- A Value Trap (SCMR)

SCMR at first glance is a valuation play, with $3.25 of cash and short-term investments on the books and the stock trading at $4.04. Their earnings have been all over the place, but it looks like their revenues are starting to grow slowly. With the acquisition of Eastern Research, pro forma results indicate growth of roughly 10% in revenues FY07 over FY06, but still the company was not profitable. The company is actually far from being profitable considering it had a $60 mln loss from operations, the reason SCMR came so close to breaking even is that the company earned over $47 million from the cash hoard. Analysts roughly project a 13% growth in revenues in FY08. The market is currently valuing SCMR as cash on hand plus 1.5x sales, that sounds about right.

Lets say an investor takes and tries to value Sycamore through their non-GAAP earnings trailing P/E. That would give a trailing EPS of $0.09, but once Interest Income is netted out, that leaves a non-GAAP loss of roughly $0.07 per share. Even in FY06 when the company was GAAP profitable, netting out interest income would give a loss of roughly $0.07 per share.

With Sycamore projected to grow revenues 10% over the the next 2 years, and no GAAP profitability net of interest income, this looks like it is valued properly on the market. Regardless of the sales multiple an investor value SCMR at, it will not be much different than the value of the company right now. There are also no catalysts on the horizon. It could be worth something when its trading closer to cash value, but there is not enough upside to get involved.

Disclosure: I don't have a position in SCMR.