Cisco Systems, Inc. (CSCO), VMware, Inc. (VMW): Is Brocade Communications Systems, Inc. (BRCD) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Brocade Communications Systems, Inc. (NASDAQ:BRCD) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

Brocade Communications Systems, Inc. (NASDAQ:BRCD)

What we’re looking for
The graphs you’re about to see tell Brocade Communications Systems, Inc. (NASDAQ:BRCD)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s look at Brocade Communications Systems, Inc. (NASDAQ:BRCD)’s key statistics:

BRCD Total Return Price Chart

BRCD Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 8.5% Fail
Improving profit margin 42.7% Pass
Free cash flow growth > Net income growth 194.7% vs. 54.9% Pass
Improving EPS 41.3% Pass
Stock growth (+ 15%) < EPS growth 47.9% vs. 41.3% Pass

Source: YCharts.
*Period begins at end of Q2 (July) 2010.

BRCD Return on Equity Chart

BRCD Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 28.3% Pass
Declining debt to equity (45.5%) Pass

Source: YCharts.
*Period begins at end of Q2 (July) 2010.

How we got here and where we’re going
Brocade Communications Systems, Inc. (NASDAQ:BRCD) got off to a great start, but its mediocre revenue growth cost it a perfect score. However, there’s no reason why a few strong quarters couldn’t nudge this company up from its six out of seven passing grades and into truly elite territory. Everything else on our analysis indicates a strong performer, but how might Brocade Communications Systems, Inc. (NASDAQ:BRCD) push its revenue even higher over the coming year? Let’s dig a little deeper.

Shares of networking storage specialist Brocade recently surged by 15% after posting better-than-expected quarterly results. However, Brocade Communications Systems, Inc. (NASDAQ:BRCD)’s has been facing ferocious competition from Cisco Systems, Inc. (NASDAQ:CSCO) and Oracle in storage-area networking, which has forced it to refocus on its proprietary Ethernet-fabric business over other core offerings. My fellow Fool Dan Caplinger points out that this technology is purpose-built for virtualized data centers, which could offer a killer edge when it comes to partnering up with the group of elite technology companies aggressively expanding into virtualization.