Juniper Networks: Recent Downtrend Is a Buying Opportunity

Juniper Networks (JNPR) is a networking infrastructure company that manufactures the high-end routers used by telecommunications firms and large enterprises to route traffic. The business is essentially a duopoly with Cisco Systems (CSCO). The firm’s business is leveraged to the explosive growth of traffic over the Internet.

Market cap: $12.7 billion; Enterprise Value: $10.5B billion

Note: Market cap and analysis assumes conversion of convertible debt.

The company is estimated to earn $1.15 per share (pro-forma) this year and $1.40 next year. It has $4 of cash per share. The earnings estimates look reasonable, and JNPR usually beats estimates by a penny or two every quarter. The company pro-forma’s out a modest amount of stock compensation. While the stock doesn’t look inexpensive on an earnings multiple basis at $23, one should note that free cash flow significantly exceeds net income due to growth in the deferred revenue balance. In fact, the stock is trading at 17x trailing free cash flow. The company is growing in excess of 20% a year, and should be able to sustain a growth rate in the teens well into the future. JNPR uses part of its cash flow to buy back its stock, and is known to step in aggressively to repurchase stock when it is down. When it reports June quarter results, I would not be surprised to find a big decrease in the share count.

The stock has come down from $28 to $23 in the last month on concern that business is deteriorating at wireline telecom firms in the US, and their purchases of equipment is slowing down. While there is some truth to this, the secular growth of Internet traffic shows no sign of abating. Also, the company’s large deferred revenue balance gives it a lot of cushion.

There are periodically rumors that Juniper could be acquired by a firm like Ericsson, but management is unlikely to sell out unless it is at a huge premium, which will probably make the acquisition unaffordable.

Fair value for JNPR stock: $30 (20x multiple on ‘09 EPS of $1.40 + $2 for excess cash)

Disclosure: Author has a long position in JNPR

Comments

[Wez]

Economic slowdown is hurting corporate business. JNPR is not immune. A lot of these kind of companies will have a hard time hitting earnings estimates next few quarters.

[borisb]

You are right that the valuation is appealing and it looks oversold falling for 8 months and might be washout around $23 or $23-. But with uncertain in the US economy whats going to give investors confidence or concrete justification to bid the shares back up to $30? would that be a June 2008 quarter earnings/guidance beat?

[precisely]

I agree with your analysis. Moreover the company has every reason to buyback stock at these prices. At $23/share, each share purchased is most likely accretive to earnings since jnpr is likely only earning under 4% on short term investments. Buying back at $1.13earnings/$23/shar... will result in more than 4.5% of virtual earnings, a .5% premium this year that will become much larger as earnings continue to grow.

Given their carrier business which has a long acceptance cycle, jnpr has had excellent visiblity into revenues at least 1-2 quarters out, and their conference calls have been uncharacteristically optimistic.

I admit that its a big IF whether they will be able to sustain their 20% growth model, but if they do, it's only 3.5 years till revenues double, so I would expect the stock eventually reflect its real value.

[Wez]

Good company, bad times. They will go under $20 before things pick up again. Just my 2cents.