A Turn-Around Stock in Networking

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

2012 has been a bumper year for turnaround plays and Riverbed Technology (NASDAQ: RVBD) seems to be one of them.  The shares of the company were trading above the $30 mark, then plunged below $15 due to Q1 earnings that missed market expectations. However, Riverbed Technology has recovered nearly 65% since the lows it created this year. I believe the stock still has the ability to head north, and here are a few reasons why.

Riverbed Technology specializes in providing Wide-Area-Network (WAN) networking solutions to both small and large scale enterprises.  The leading networking equipment provider, through its software and hardware products, boosts a company’s network performance; which enables their customers to boost their transmission speeds by up to 100 times, compared to a non-optimized network. The company shares its market space with Cisco Systems (NASDAQ: CSCO), F5 Networks (NASDAQ: FFIV) and Juniper Networks (NYSE: JNPR).  Analysts expect the network optimization industry has the potential to grow at 20-25% each year, for the next 3-5 years.

The company recently entered into an agreement with Juniper Networks that is expected to generate $75 million in revenue over the next 4 years. Both companies would be merging their mobile technologies to provide mobile acceleration solutions to smartphones and tablets. The merged technology would offer the most advanced networking solutions, while being cost efficient. The management of the respective companies believe that this move will allow both companies to beat market competition and ultimately expand their user bases.

The company recently announced its financial results with revenue beating market estimates of $194.5 million, and reported $199 million, which was a 17% spike over last year's quarter. The EPS stood at $0.23, which was 9.5% higher compared to last year's quarter and market estimates. The management expects 2012 revenue to increase to $219 million, up 15% from the same period last year.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>Gross Profit Margin</p> </td> <td> <p>EPS growth next 5 years.</p> </td> </tr> <tr> <td> <p>Riverbed Technology</p> </td> <td> <p>0%</p> </td> <td> <p>76%</p> </td> <td> <p>20.9%</p> </td> </tr> <tr> <td> <p>F5 Networks</p> </td> <td> <p>32%</p> </td> <td> <p>61%</p> </td> <td> <p>8.7%</p> </td> </tr> <tr> <td> <p>Cisco Systems</p> </td> <td> <p>0%</p> </td> <td> <p>82.8%</p> </td> <td> <p>19.3%</p> </td> </tr> <tr> <td> <p>Juniper Networks</p> </td> <td> <p>14%</p> </td> <td> <p>62.6%</p> </td> <td> <p>13.7%</p> </td> </tr> </tbody> </table>

Among the competitors, Riverbed Technology has the second highest profit margin. Riverbed Technology operates with little or no debt, and analysts expect the EPS growth to be around 21% which is the highest among its mentioned peers. Additionally, the five year estimated PEG of Riverbed Technology is 0.8x and a forward P/E of 19.5x, indicating that the stock is still undervalued.

Additionally the management of the company announced its share buyback program under which $300 million of shares would be repurchased by the end of 2012. For a company which is performing better than the street’s estimates, a share buyback plan is positive news for investors. This highlights the amount of faith the board has in the company’s future.

Riverbed Technology operates in an industry which is expected to grow at a rapid rate for the next 3-5 years. The financial metrics look good, the financial results were better than expected, and the stock has risen nearly 65% since the lows it created this year.  Also the share buyback and the agreement with Juniper Networks will lead to stock appreciation; it is due to these reasons that Riverbed Technology has a Foolish Buy Rating.

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PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of F5 Networks and Riverbed Technology. Motley Fool newsletter services recommend F5 Networks and Riverbed Technology. 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.

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