This Networking Company is Ahead of the Competition

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

In this age of information technology, networking is perhaps the most crucial link in the way people communicate today. As internet penetration continues to grow in emerging markets such as China and India, we can assume that producers of networking products will see increasing demand for their products. Netgear (NASDAQ: NTGR) is a major producer of networking hardware, with a strong presence in emerging markets. Additionally, they are undervalued compared to the industry at the moment, and thus, to me, are worthy of consideration.

Profile

Netgear is a small company by most standards, with only 791 employees and a market cap of $1.28 billion. However, don’t let this scare you off. Located in California, they produce a range of networking products for consumers and enterprises, ranging from Ethernet switches to routers, media servers, wireless access points and adapters. The company has a strong presence in India as well as in the more developed markets, and has performed quite well this year.

Earnings

Fiscal 2011 EPS growth outpaced the market by almost a full percentage point, and earnings in 2012 have also been quite impressive. Despite the weakness in Europe, as mentioned by the management, Q3 net revenue growth was up 4.4% year over year. Europe, the Middle East, and Africa revenues were down 13% YoY, but this was compensated by a stronger performance than usual in North America. Due to continuing weakness in Europe, the management is increasingly relocating sales and marketing resources to emerging markets where there is more growth to be achieved. Competitor Cisco (NASDAQ: CSCO), despite having a much higher market cap as well as a higher operating margin, has lagged the industry in terms of EPS growth in 2011 and 2012. The same is true for revenue growth over the same period.

Strong Growth

According to Netgear’s CEO, his company is growing faster than its competitors. Growth in 2011 was an impressive 32%, partly as a result of R&D investments and the rapid introduction of new products. Despite the tough macro-economic backdrop, Netgear’s cash position is more than impressive. They have absolutely zero debt on the books over 360 million dollars in cash. This will allow them to continue funding R&D, crucial for staying ahead of the competition in terms of growth.

Valuations and Metrics

The company is also valued attractively at the moment. It has a P/E of 13.76x, a forward P/E of 12.06x, and trades at 1.75 price to book. The operating margin looks decent around 10%, and the return on equity is a respectable 13.9%. These figures certainly look interesting compared to some of Hewlett Packard’s (NYSE: HPQ) metrics. HP has an operating margin of 7.48% and a profit margin of -4.54%. Furthermore, the return on equity is -15.6% and the company has 29.78 billion dollars of debt on its books, which is more than its market cap.

Bottom Line

In summary, Netgear seems well positioned for growth in coming years. They carry no debt, which is a pretty amazing feat in the current economic situation. Also, they have been displaying impressive growth which has outpaced the industry. With an extensive product portfolio and a growing presence in emerging markets, the company should be able to continue their strength in product development and keep their books and cash position healthy.

 


DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Netgear. Motley Fool newsletter services recommend Netgear. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure