Is This Sell-off Justified?

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Netgear’s (NASDAQ: NTGR) recent earnings release has disappointed its investors. Though, the company topped both earnings and revenue estimates, it has lowered its future guidance on the basis of a soft commercial market and weak pricing in its HDD segment. However, given the recent slashing of future guidance by virtually every peer of Netgear, it seems as if the weakness is not stock specific, and it might be a headwind for the overall Wi-Fi hardware equipment manufacturers.  

Netgear Earnings

Netgear reported an in-line 4Q12, with revenue/non-GAAP EPS at $310.4 million/$0.55, above Street estimates of $307.5 million/$0.54. For F1Q (March), the management guided a revenue of $290-305 million, which was below the prior Street’s estimate of $317-$317.1 million.

Implications

F4Q retail results were stronger than expected due to improving retail footprint (35k retailers as of 4Q versus 3Q’s 32k), offset by weaker than expected Commercial results. The Street had estimated that normalized (to pre-Thai flood levels) HDD pricing would have helped the Commercial Network Attached Storage (NAS) business to recover in 4Q12, but it was again weak during the quarter as higher-priced Netgear and channel inventory were still being worked through. This higher-priced inventory overhang will likely remain in F1Q and lead to further Commercial weakness, which combined with an ongoing slowdown in Netgear’s international service provider (ISP) customer deployments led to weak F1Q guidance. However, that doesn’t mean that I am completely bearish on Netgear. The company does have opportunities in 2013 including:

1) More competitively priced NAS product should benefit F2Q;

2) Commercial switching should benefit from new 10G product;

3) The potential Arris/Motorola tie-up could lead to SP opportunities; and

4) Its 802.11ac ADSL router in Europe is a unique offering.

Investor questions linger on the financial impact of the Sierra Wireless (NASDAQ: SWIR) acquisition. Investors were excited by Netgear’s acquisition of Sierra Wireless’ business for $138 million in cash and $6.5 million in assumed liabilities. Netgear ended the fourth quarter with $376.9 million in cash, so its financial outlay for the acquisition should be more than manageable. Sierra, for its part, was happy to take the cash, preferring instead to improve its machine-to-machine and connected device markets.

Netgear’s CEO is extremely bullish on this deal. He thinks this deal will help his company to take advantage of "brand new 4G LTE fixed mobile data, voice, and media gateway market, which is expected to grow from less than $100 million last year to over $1.5 billion in five years."

Valuations

For FY2013/2014, the Street estimates the EPS to be $2.40/$2.65 from prior estimates of $2.74/$3.06 on lower Commercial/SP revenues.

On the basis of a forward multiple of 15x and 2013 EPS of $2.40, Goldman Sachs has set a target price of $36, which is 9% upside from current levels.

Key Risks

Risks include market growth, market share shifts, and macro uncertainty.

Ruckus Wireless (NYSE: RKUS)

This has been one of the other wireless equipment players that has suffered as result of negative investor sentiment. Despite an earnings beat and revenue guidance in-line for FY2013, the stock has been falling mercilessly as investors are fearing a weak market ahead of them. The stock is down 23% since the earnings release on Feb. 12.  On its earnings call, Ruckus did note that it expects its 2013 profits to be affected some by sales/R&D investments, but struck an upbeat tone about demand. Therefore, I believe the stock has been unlucky given such a massive fall. Some believe that the stock is getting punished for having expensive valuations, as recently the stock was downgraded by Needham.

Foolish Bottom Line

There is no doubt that this industry faces some headwinds in the form of weak commercial demand. However, the recent sell-off has brought prices to ideal levels.

 


AnalystX has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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