Sycamore Cut Down to a Sell

Sycamore Networks, Inc. (SCMR) continues to experience disappointing financial performance as revenues and earnings are trending lower on a sequential quarter basis. The company's fourth quarter fiscal 2008 financial results were significantly below our expectations, primarily attributed to a contract loss from one of its major customers.

On September 5, Sycamore announced fiscal fourth quarter 2008 earnings results. Total revenue of $15.1 million was down 60.3% from the year-ago quarter and down 24.9% sequentially. Gross margin was 28.7% compared to 46.5% in the prior-year quarter. Adjusted diluted EPS, excluding impairment charges, was a loss of $0.03 for the fourth quarter of fiscal 2008.

We remain concerned that Sycamore may have difficulty generating sustainable business from carriers for its product capabilities as larger vendors address these markets with competing solutions. Furthermore, demand for optical networking appears to be more favorable than in past years, but Sycamore's financial reports suggest year-over-year revenue decline in spite of the acquisition of Eastern Research in 2006. We downgrade our rating to a Sell due to a lack of near-term visibility for improvements and concern that business will depend on only a limited number of customers.

We do not find any meaningful investment catalysts for the company that may drive a near-term valuation improvement. According to our view, revenue will remain lumpy through Fiscal 2009 as Sycamore is dependent on only a limited number of customers for revenue. Expenditures are expected to increase due to new product introductions and integration related costs associated with the acquired entity.

American Electric Market-Neutral

American Electric Power Company, Inc.'s (AEP) consistent performance at the East Regulated segment, new 765-kV transmission lines at PJM, approval for the new Turk plant, joint venture with Duke Energy Corp. (DUK), and favorable approval of rate changes from the PUCO and PUCT are expected to drive modest earnings growth over the near-term.

However, the delayed construction of the West Virginia and Ohio IGCC plants, lower earnings from MEMCO, rising debt level, escalating coal costs and uncertainty surrounding pending regulatory cases collectively continue to weigh on the stock.

Accordingly, we maintain our market-neutral Hold recommendation on AEP common stock with a six-month target price of $40.50. Price appreciation to our near-term valuation target, coupled with the $0.41 per share quarterly cash dividend which we deem sustainable and secure represents annualized total return potential of 13.2%.

Going forward, AEP offers investors stable underlying core utility earnings, although with only modest growth potential. As of this report, AEP common stock trades at 11.8x our current-year 2008 operating earnings per share estimate and 11.5x our forward 2009 EPS estimate, or at the lower-end of the P/E range of comparable diversified energy utilities and the broader electric power utility industry. Likewise, relative price multiples of cash flow indicate a modest discount valuation for AEP. However, relative price multiples of sales and book value are in-line with the electric utility industry median values.

Amgen Stays a Long-Term Hold

Amgen, Inc.'s (AMGN) results over the past few quarters demonstrate the challenging, but stabilizing ESA market.