Thursday, April 9, 2009

Juniper Networks (JNPR) and F5 Networks (FFIV) Benefit from Low Expectations

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One thing we are starting to see in many sectors are the benefit of low expectations... as long as you don't completely blow up a quarter people seem to be relieved. Many of the consumer discretionary names are seeing this behavior and in the middle of the week we have two names in the networking group benefiting from the same ethos - Juniper Networks (JNPR) and F5 Networks (FFIV). As I stated yesterday [Apr 8: Stimulus Fire Hydrant (Worldwide) Should Benefit Networking Companies/Broadband] we can at least make some fundamental case here, unlike many other sectors who are bouncing due to "we see some stabilization at worst ever levels". Eventually valuation needs to come back to earnings, and at some point when we stop rotating from "student body left" (sell everything) to "student body right" (buy everything) companies with actual fundamental stories should separate. We don't seem to be there yet, but hopefully sometime in 2009.

Both JNPR and FFIV reported nothing special and indeed both had revenue misses on guidance but the stocks still surged, which is a net positive. Here are some samples of the views on both companies...

Juniper Networks via AP
  • Shares of Juniper Networks Inc. jumped in premarket trading Wednesday after the network equipment maker said first-quarter earnings should meet forecasts even as revenue won't meet expectations.
  • The Sunnyvale, Calif. company projected sales between $760 million and $765 million. Analysts expected $794.3 million, according to a Thomson Reuters poll. But Juniper said falling costs will keep adjusted earnings in line with estimates.
  • Morgan Keegan analyst Simon Leopold, who has a "Market Perform" rating on the stock, told clients in a note that "the update won't come as a shock, and investors may be encouraged by the cost controls and earnings."
  • In a note to investors Wednesday, Jefferies & Co. analyst William Choi said Juniper has been focused on smart investments and products that should boost its market share.
  • But he kept a "Hold" rating on shares, adding, "We remain concerned in the near-term due to limited demand visibility and lower operating profitability."
Via Reuters
  • ... investors focused on its outlook for higher earnings on bigger cost cuts.
  • Analysts said the decline was worrying but no surprise in a weaker economy, and forecast a solid recovery once overall business conditions improve and telecommunications service providers begin investing in network equipment again.
  • "Despite the continued top-line weakness, we continue to believe service provider spending, which makes up 70 percent of Juniper's revenue, is largely cyclical and reaccelerates on the other side of this cycle later in the year, or early 2010," J.P. Morgan analyst Ehud Gelblum said.
  • ... Juniper's update for operating expenses "is a whopping $30 million, or 8%, below prior guidance." This, he surmised, may be due "to much lower bonus accruals from the significantly lower top line as well as tighter, but likely one-time in nature, overall cost controls." Among other things, the company could have resorted to higher levels of forced use of accrued vacation time, Gelblum said in a research brief.
Essentially it is a lot of cost cutting ... some of it 1x in nature but Wall Street claps.

F5 Networks via Reuters
  • Network-equipment maker F5 Networks Inc (FFIV) raised its second-quarter profit outlook, but said revenue would fall short of its earlier expectations. The company also raised the lower end of its previous profit outlook range excluding items.
  • For the second quarter ended March 31, F5 now expects a profit of 23 cents to 24 cents a share, up from its earlier outlook of 19 cents to 21 cents a share. Excluding items, F5 now expects to earn 37 cents to 38 cents a share, compared with its earlier view of 36 cents to 38 cents a share. It expects revenue of $154.1 million, below its earlier view of $157 million to $164 million.
  • F5 said sales in the quarter were slower across all regions. Revenue from F5's application delivery controller business was flat year-over-year, while revenue from its file virtualization business fell.
Via AP
  • Analysts hailed the company's cost controls, which included taking steps such as cutting 6 percent of the workforce, that protected its margins. Seattle-based F5 makes products that manage and route computer network traffic.
  • "We believe management continues to distinguish itself with prudent cost controls and are increasingly confident that operating margin targets will be met even with the top-line uncertainty," said Lazard analyst Ryan Hutchinson in a research note.
  • Jefferies analyst William Choi noted that the release of F5's flagship TMOS software, version 10, in the next couple of weeks should enhance the company's competitiveness. "The new OS is extremely comprehensive and includes several new features," he said in a research report. "While we do not anticipate an immediate upgrade cycle, we believe the new operating system meaningfully enhances F5's competitive position."
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So essentially we have a similar story in both - revenue is faltering, missing expectations but by firing a lot of people and keeping an eye on costs margins are somewhat maintained. Investors are slapping a lot of lipstick on pigs and as with almost every industry right now, looking ahead to brighter days "around the bend". It takes some serious leaps of faith but at least in this sector we have some light in the future due to taxpayer handouts. I don't know if it will offset the lost business from actual telecommunication and enterprise companies hunkering down on spending but the bulls think so.

There are a multitude of names in this "group" (they all are in different parts of the supply chain) but the big dog is obviously Cisco Systems (CSCO) - obviously the way to play if you are focused on large caps and the most internationally exposed. Not really my thing since I like to focus on mid and small caps.

Let's look at charts for the 2 names I listed above, plus two smaller niche players - Riverbed Technology (RVBD) and Bluecoat Systems (BCSI). We've owned all 4 in the past at one time or another but not since latter 2007 into spring 2008. [Another name in the optical side of networking is Ciena (CIEN) which I did not include here]

Technically, yesterday's spike in F5 Networks turned it from a chart to short to a chart to go long - but we'll see if it lasts.

Juniper? Eh.... still not excited there

Blue Coat Systems has made a huge run and has held the 200 day moving average nicely, during pullbacks

Riverbed Technology looks like an even stronger version of Blue Coat ...

In terms of business I probably favor Riverbed the most because what they offer provides cost savings (WAN optimization) even in a very tough environment for corporations. It also happens to have a stellar chart after this recent run.

I'll be looking to add most likely Riverbed if I can get a nice pullback back down to the $13s range, Blue Coat perhaps in the $12s.

The market never seems to really lose its NASDAQ induced love affair with tech stocks from the late 90s (and even before that) - these are very cyclical stocks who seem sexy but are hyped up version of industrial stocks. Every so often investors have their fallouts with them, but fund managers seem to think there is some halo around this sector. So as the NASDAQ continues its outperformance I have been dusting through the old bin trying to find some old ideas that are "new again". Because somehow technology stocks operate in a parallel universe we call hope.

Here are some old stories on these stocks back in 2007 or early in 2008 when these stocks could not stand up straight and the market was hating them.... we'll see if I have better luck this time.
  1. [Feb 21, 2008: Abject Pity for Blue Coat Systems - I'm Out]
  2. [Feb 5, 2008: Riverbed Technology Continues to Execute and the Stock Continues to Fall]
  3. [Nov 27, 2007: Riverbed Technology - Fortune Article]
  4. [Nov 20, 2007: A Damn Shame - Blue Coat Systems]
  5. [Oct 25, 2007: Networking Peers Continue to Hit Blue Coat Systems]
No position


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