Why This Stock is a Sell Ahead of Earnings
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems there’s always something bothering Juniper (NYSE: JNPR). As much as I’ve wanted to like the stock, execution has been lacking. Granted, weak carrier spending has impacted its performance. But when compared to Cisco (NASDAQ: CSCO) and a few smaller rivals, the story changes dramatically -- it says Juniper is heading in the wrong direction. And until management can put together consecutive quarters of solid growth, investors would be wise to stay away.
Being Left Behind by Bigger and Smaller Rivals
Juniper’s been unable to find meaningful ways to grow. Not only has the company fallen behind Cisco, but it is being outperformed by smaller entrants Aruba Networks (NASDAQ: ARUN) and Palo Alto Networks (NYSE: PANW). Complicating matters is that at a P/E of 60 with poor growth, the stock is too expensive. And investors are betting too much for returns that have yet to come.
In Juniper's Q3, the company posted adjusted earnings per share of 14 cents – missing estimates, while revenues grew at a paltry 1.1%. Meanwhile, Cisco earned $2.6 billion in net income, or 48 cents per share on revenues of $11.9 billion. Remarkably, not only did this represent 6% revenue growth, but Cisco’s profits surged 11%, helping the company amass $45 billion in cash.
For Cisco, this was the company’s seventh consecutive earnings beat -- a trend that I expect will continue going into 2013, especially since industry experts project a prolonged recovery in enterprise spending. But Juniper may not participate in this rebound since its poor switching and services performance proves that it is bleeding market share.
Plus, despite the company's recent cost-cutting efforts, which includes reducing headcount by 500 positions, there is evidence that things might get worse. The company is doing this in hopes of saving $150 million annually. That's all well and good. But absent concrete growth plans, the future remains bleak. There'll be plenty of cash, but no growth. What does that leave investors?
By Contrast, Cisco has been on a shopping spree of late with its cloud-based acquisitions. Likewise, Juniper has a lot to prove to keep up with smaller Aruba Networks, which just completed its 13th consecutive quarter of revenue growth – that’s not a typo. In its most recent quarter, Aruba saw 22% year-over-year growth and 6% sequentially to $137 million.
Aruba’s core vertical products have consistently performed and the company experienced general enterprise growth as it earned $22.1 million, topping analysts’ estimates by 1 penny. Aruba enjoyed solid sequential growth in the U.S. (+14%) while Juniper guided lower. Meanwhile Palo Alto Networks produced a quarter for the ages, during which revenues soared almost 90%.
What's more, billings jumped 57% and the company’s product revenue grew by 70%. This is while revenue from services shot up a eye-opening 135% year-over-year. Overall revenues for fiscal 2012 grew 115% to $255.1 million -- exceeding its 2011 mark of $118.6 million. Calling these numbers impressive would be an understatement.
Remarkably, these numbers arrived from the competition as Juniper blamed Europe and carrier spending for its weak performances. But does Cisco not have the same exposure? As it stands, Juniper has fallen behind the rest of the group and it doesn't appear able to keep up in any meaningful way, at least not to the extent that justifies the premium in the stock. It will also help if the company were to stop making excuses.
Juniper needs to find ways to create momentum to inspire investors to believe. But it has a chance if its cost-cutting efforts can prove effective. Also the company recently announced the acquisition of software-based networking start-up Contrail Systems for $176 million in cash. If the company can figure out ways to harvest growth synergies, investors can be rewarded. But it’s not a quick fix.
Bottom Line
Despite these concerns, the stock has seen a slight uptick of late. However, in a space dominated by Cisco and even forgotten names such as Alcatel-Lucent, Juniper will find it difficult to expect more silver linings to be extracted out of more “less bad performances”. Disappointingly, the company has been unable to thrive amid struggles by HP and Dell.
Clearly, Juniper is heading in the opposite direction and investors would be wise to stay away – at least until management can demonstrate that the company has a solid plan for the future. On the other hand, should the stock drop by another 20%, the story changes. Until then, I would be a seller here.
rsaintvilus has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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!
