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Juniper Out On A Limb
There is a lot to like about Juniper Networks (Nasdaq:JNPR). The data networking gear maker holds a solid spot in the market and sports a gleaming balance sheet with about $2.2 billion in cash and zero debt. Despite the slowdown in enterprise and carrier spending that has damaged industry revenues and earnings, Juniper squeezed out an impressive $163.9 million in cash flow last quarter. Its valuation, on the other hand, is another matter. As likable as the company may be, its stock price is starting to look stretched.
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Juniper Rising
Juniper shares have surged almost 90% since March. With the stock having fallen below $13, the uplift is uncertainly justified. But the correction is now complete. Even if telecom carrier spending soon starts to stabilize as the company suggests it will, Juniper is going to be hard-pressed to post grow numbers that warrant anything much higher than a $24 price tag. Trading on a forward price-to-earnings multiple of 25, Juniper looks pricey. Analysts reckon Juniper's top line revenues, after falling by about 12% this year, will grow by about 15% per year once the telecom spending makes a comeback. Of course, Juniper has often traded on a PE multiple of 25 or even higher in past years. But looking back, the company's growth rates were a lot higher than what appears to be in store for the years ahead.
Sizing Up the Competition
How does Juniper stack up against its peers? Cisco Systems (NYSE:CSCO), by comparison, trades at just 16-times forward earnings. Of course, Cisco is a bigger, more mature tech company that you normally wouldn't expect to grow at the same rate as its younger competitor Juniper. All the same, the gap between the multiples looks awfully wide. Look at Brocade Communications Systems (Nasdaq:BRCD), which is making a big play in data networking with its recent purchase of Foundry Networks and an important distribution partnership with IBM (NYSE:IBM). Brocade trades at just over 11-times 2010 earnings. If that doesn't convince you, consider that Juniper trades on an enterprise-to-sales multiple of three times. Alcatel-Lucent (NYSE:ALU), by contrast goes for just over 0.3-times sales. Owing to its poor performance, Alcatel-Lucent stock deserves a discount. But consider this: for each dollar worth of Juniper sales, investors are forking over more than ten times what they would for a dollar of Alcatel-Lucent sales. Investors should find that hard to swallow. (For more, see Value Investing Using The Enterprise Multiple.) The Bottom Line
Juniper is a solid company, but that doesn't mean you should pay just any price for it. (For more, see Technology Sector Funds.)
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Juniper shares have surged almost 90% since March. With the stock having fallen below $13, the uplift is uncertainly justified. But the correction is now complete. Even if telecom carrier spending soon starts to stabilize as the company suggests it will, Juniper is going to be hard-pressed to post grow numbers that warrant anything much higher than a $24 price tag. Trading on a forward price-to-earnings multiple of 25, Juniper looks pricey. Analysts reckon Juniper's top line revenues, after falling by about 12% this year, will grow by about 15% per year once the telecom spending makes a comeback. Of course, Juniper has often traded on a PE multiple of 25 or even higher in past years. But looking back, the company's growth rates were a lot higher than what appears to be in store for the years ahead.
Sizing Up the Competition
How does Juniper stack up against its peers? Cisco Systems (NYSE:CSCO), by comparison, trades at just 16-times forward earnings. Of course, Cisco is a bigger, more mature tech company that you normally wouldn't expect to grow at the same rate as its younger competitor Juniper. All the same, the gap between the multiples looks awfully wide. Look at Brocade Communications Systems (Nasdaq:BRCD), which is making a big play in data networking with its recent purchase of Foundry Networks and an important distribution partnership with IBM (NYSE:IBM). Brocade trades at just over 11-times 2010 earnings. If that doesn't convince you, consider that Juniper trades on an enterprise-to-sales multiple of three times. Alcatel-Lucent (NYSE:ALU), by contrast goes for just over 0.3-times sales. Owing to its poor performance, Alcatel-Lucent stock deserves a discount. But consider this: for each dollar worth of Juniper sales, investors are forking over more than ten times what they would for a dollar of Alcatel-Lucent sales. Investors should find that hard to swallow. (For more, see Value Investing Using The Enterprise Multiple.) The Bottom Line
Juniper is a solid company, but that doesn't mean you should pay just any price for it. (For more, see Technology Sector Funds.)
by
Ben McClure
Ben McClure is a long-time contributor to Investopedia.com. A specialist in preparing early stage technology ventures for investment and the marketplace, Ben manages the Business Incubator at the University of Malta. Ben was a highly-rated European equities analyst at London-based Old Mutual Securities, and led new venture development at TEC Edmonton, a major technology commercialization consulting group in Canada.
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