The wait continues for Juniper Networks (NYSE:JNPR). With much less exposure to enterprise customers, Juniper has been in a holding pattern as service providers have dramatically slowed their spending. For 2013, however, the company has several relatively new products to drive better sales, and early signs point to that long-awaited rebound in carrier spending. There are still big unknowns regarding Juniper's long-term margin potential, but Juniper could still offer upside at these levels.

SEE: The Industry Handbook: Telecommunications Industry

A Good End to the Year, Especially on Expenses
Juniper reported that revenue rose 2%, both sequentially and year-on-year, for the fourth quarter. Product revenue came up a little soft (down 1% and up 1%, respectively), while service revenue rose 7 and 5%. Overall routing sales were decent (up 5 and 3%), helped by the MX line, while switching (-7%, flat) and security (-8, -4%) were both unimpressive.

Where Juniper really shone was in expense control. Gross margin (non-GAAP) improved two points from the year-ago level and beat sell-side expectations by a full point. Operating income performance was less impressive (roughly flat from last year), but operating margins nevertheless came in at 18.2% - well ahead of both the analyst average (15.7%) and management's own guidance (which topped out at 16%).

SEE: How To Pick The Best Telecom Stocks

Will the Carrier Spending Recovery Finally Materialize?
Waiting for major service providers/carriers like Verizon (NYSE:VZ) and AT&T (NYSE:T) to resume infrastructure spending has felt like waiting for Godot. While nobody denies the ongoing traffic growth, nor disputes the idea that future growth will require additional capital expenditures, the timing has proved difficult to nail down. With about two-thirds of its revenue coming from these companies, Juniper needs that spending recovery to materialize in 2013 if it's going to be a good year. Maybe this quarter is a step in the right direction, as service provider revenue rose 9% from last year and 5% from the third quarter.

Likewise, the company needs new products to succeed. Juniper's new PTX switches have been seeing good traction (probably doing well at Verizon, given that company's increased significance as a customer), but the uptake for the T4000 core router has been slower. Juniper's customer base has apparently been prioritizing edge routing recently (backed up by the good MX results), but this is still a high-potential product that should shift some share from Cisco (Nasdaq:CSCO).

Regaining Share May Not Be Easy
While Juniper has gained some share at Cisco's expense in carrier routing in the past, Cisco seems to be ready to fight for share again. On the other hand, Alcatel-Lucent's (NYSE:ALU) share in edge routing could be vulnerable to Juniper, and Hewlett-Packard (NYSE:HPQ) and Dell (Nasdaq:DELL) could be incrementally vulnerable in enterprise.

One area about which I'm more concerned about Juniper's prospects is security. Juniper has been losing ground here for a little while now, with Cisco and Check Point (Nasdaq:CHKP) both well ahead of them. Unfortunately, this space is only getting more competitive, with newcomers such as F5 (Nasdaq:FFIV) looking to make a mark and pure plays such as Palo Alto (NYSE:PANW) and Fortinet (Nasdaq:FTNT) likewise gaining share. Now there's some apples-to-oranges comparison here, as these companies don't all compete for the same business at all times, but I stand by the overall point that Juniper is facing an increasingly competitive market in security, and I'm not sure the company has the technology to rebuild share.

SEE: Cell Phone Evolution

The Bottom Line
Given how the carrier market largely went to sleep, Juniper has actually fared pretty well during the downturn. With new mobile devices like smartphones and tablets driving strong traffic growth for service providers, I like the company's chances of seeing revenue growth reignite over the next year.

To that end, I think Juniper can garner about 7% long-term revenue growth, with substantially higher growth rates over the next few years. Where I have bigger doubts is on the free cash flow line - I think the company can return to mid-to-high teens free cash flow margins, but I don't think it'll get back into the 20% range. All told, I see the potential for almost 18% long-term free cash flow growth, with substantially higher growth rates over the next three to five years.

With that sort of growth, I see Juniper's fair value in the high $20s, and I suppose there's an upside if you believe Juniper can get back to the free cash flow conversion rates of six or seven years ago. Either way, these shares are priced at a level where I think they're an interesting option for investors looking to play a long-awaited service provider spending rebound, complemented with some worthwhile new product stories.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center