Emulex Corp. may have fallen victim to a damaging news hoax in August, but the Costa Mesa-based company is having the last laugh.
Shares of the networking gear maker not only have bounced back from their hoax-inflicted lows but are gaining ground on the highs set in the spring before the meltdown in technology stocks. Last week, Emulex shares were trading at around 155.
Along the way, Emulex shares have rocketed ahead of most other tech names, which have been snared in a renewed sell-off. As of last week, Emulex’s market capitalization was $5.6 billion, or three times what it was at the end of August.
Emulex’s strong financial performance has helped surmount the hoax press release that had the company restating earnings and Chief Executive Paul Folino stepping down.
The company blew past earnings estimates on Oct. 19 when it posted a profit of 33 cents a share for the fiscal first quarter ended Oct. 1. That was an 83% increase from the same period last year. Sales nearly doubled from the year-ago period to $55.5 million.
“We’re growing at such a rate that I think that you become immune (to such pranks),” said Kirk Roller, senior vice president of sales and marketing for Emulex.
The company’s results are being fueled by growth in network storage. Emulex makes fibre channel adapters and other devices that speed the flow of data on the Internet and other computer networks. The sector is expected to grow about 60% a year, according to market researcher International Data Corp.
Emulex also received kudos for its handling of the fake press release. Within hours, Folino and other company executives were out in force trying to reassure investors.
Highs and Lows
“One thing that played to our favor was that just three weeks prior to that, we’d reported a tremendous quarter and the end of a record year,” Roller said. “Additionally, the speedy arrest (of the alleged prankster) helped us.”
Emulex was riding high before the hoax. On Aug. 3 it reported strong results for its quarter ended July 2, and the company’s stock had been trending up since April.
But the rally abruptly ended on Aug. 25 when the fake press release hit the news wires at 9:30 a.m. East Coast time, sparking a selling frenzy.
More than $2.5 billion in market value was wiped out by the time Nasdaq halted trading of the shares about two hours later. The stock fell from about 100 to as low as 43, knocking the company’s market value down to $1.6 billion.
But at least two funds were snapping up Emulex shares while investors were unloading, because they realized the release was a hoax and liked the company’s fundamentals. AIM Emerging Growth Fund took advantage of the low prices and picked up shares near 45, just a few minutes before trading was halted.
Window of Opportunity
“We’d been looking to add to our position in (Emulex) anyway and it had kind of run away from us,” said Jay Rushin, senior equity analyst for the Houston-based fund group. “We figured we would have bought it two weeks ago but didn’t have time to buy enough of it before it started to run, so here was our shot.”
Evergreen Small Company Growth was one of the biggest buyers of Emulex stock as of Sept. 30, according to fund-tracker Morningstar Inc. Fund manager Gary Craven, who already owned some shares, said he was panicked when the bogus news came out. But he soon bought more.
“We think storage-area networking is one of the strongest growth areas in technology,” he said. “In a lot of areas of tech you really have to reach to justify the prices of the stocks but in this particular sector, companies are pretty attractively valued based on their actual earnings power.”
Emulex is expected to earn $1.43 per share for the fiscal year ending in June, a 91% jump from the year before, according to analysts polled by First Call/Thomson Financial. Profit is expected to grow about 35% a year in the next five years.
The news prank isn’t easily forgotten, fund managers said. Still, it hasn’t tarnished the company name, they said.
“It was a crazy day and a very interesting story, but I don’t think it’ll ever taint the Emulex story,” AIM’s Rushin said. “Maybe it’ll teach California companies’ investors relations people they might need to get one person in the office a little early.”
And that’s just what Emulex has done, according to Roller. The company now has a 24-hour phone service to answer investor and media calls. Before the hoax, it answered the phones during business hours only.
A fringe benefit of the prank: “Now people know who Emulex is,” Roller said. n
