Networking Hardware, Profitable or Old Hat?
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Networking technology has been around since the dawn of time, or at least as long as the Internet has been useful. Now instead of networking technology we call it networking hardware. The space is so mature it is just about churning out faster and better hardware. Obviously, there are some serious innovations to be made, but it's not as interesting as it used to be. People are all aflutter about the cloud. Well the cloud is on the Internet so networking has to keep pace with everyone using the cloud.
The first name in networking hardware is Cisco Systems (NASDAQ: CSCO), which I really like a lot. I am going to say something shocking and say that I also like Cisco's management. I have had numerous conversations where I railed against the market for overreacting when Cisco cut its outlook severely after the second quarter. Forums sometimes get me so irritated, but I look at them because there are some very intelligent people. The forecast cut was prudent. All the other companies released earnings early to get the bad news out saying they would miss targets by a lot. Cisco was in line with and slightly exceeding expectations. Being conservative in estimates is not a bad thing. Estimates are supposed to reflect reality. The point is that I was impressed with management's sensibility, and I feel that Cisco can return to a position of stock price prominence before settling down with its dividend.
Any Cisco shareholder has been thoroughly trained in frustration. The stock price seems absolutely wedded to the $18 to $21 range. If you do believe that Cisco can reclaim the $30s, then the introduction of the dividend will allow it to pay for space in your portfolio. Cisco has some great products coming up. Most of them deal with mobile data and LTE. I know that small cell radios are impending. Cisco is behind the curve on small cell radios, though there are other products like gateways. Also, WiFi network gateways that do not require users to login are coming soon. That is just one of the aspects and Cisco is working on a full end-to-end solution. If you are really interested in the complex engineering aspects you can read Cisco's white paper, but it's really technical. You can also glance at the products here, but unless this is your field or passion you can just look at the names.
I do not want to move too far into mobile data, but that is networking now. The whole point of LTE is that it is IP-based, and in some respects networking has expanded to include mobile data. Cisco has almost $50 billion in cash. Yes I rounded up substantially, but at those numbers I don't think it matters much. It has $8 billion in net income (ttm), and almost $3 billion in free cash flow. Am I worried about Cisco as a company? No, but its stock leaves something to be desired. I think the market will wake up at some point, because Cisco will make some good changes and make some headlines. Rarely do I come down hard one way or another, but I have followed Cisco for a long time. I wish student loans weren't so killer, because if I could buy a large chunk of Cisco and I would hold onto it for a long, long time.
When I think competitors, I think Juniper Networks (NYSE: JNPR). There are other competitors, but for me the first if Juniper. This company has fallen on some hard times. It has suffered quarter after quarter of declining earnings growth. There are too many numbers to go over, but the last three quarters' are -47.62%, -87.50%, and -50.00%. The trend is pretty much similar going back to 2009, with some slight deviations. The negatives are more consistent so be cautious and go with those.
Caution is the same reason I am going to discount the recent acquisition rumblings. The rumor, which is what I am calling it, is that EMC Corp (NYSE: EMC) is making a bid for $20. A few things are wrong with that in my eyes. First, EMC is not going to buy a company for what amounts to 1/5 of its value in a field that it is not in. That is not to say that it is not possible to do a cash and stock acquisition, but it would drain EMC. I do not see the upside for EMC really. The risk is huge and the cost is huge and seems absurd. EMC would be better off starting smaller. Second, Juniper is not in such dire straits that it would accept a paltry premium. I would think management believes it can do a lot better. I think it can.
There is nothing substantial in that regard, do not count on it. Also, do not swoon over the recent bump. I mean if you play the risks and think its worth it if even remotely possible, fine. However, if you are looking for a long-term hold then turn away. The acquisition news is actually a negative. Unless something more substantial than the one report that spread across the Internet, the risk is too high. Also, having been bumped up because of the news it will be punished if the news does not pan out. That means it is not even a hold for me because of the bump. The news is pretty suspect.
Juniper is not a dead company. It is just one that I think has to make some big changes, and get hit with some luck. It may not be a buy for me right now, but it could be some day. The company is not so far in a hole that it can feel the earth's core under the floor. With cash near $3.5 billion and a debt-to-equity ratio of 0.1386, Juniper has some wiggle room to turn the business around. If I feel that Alcatel-Lucent is not too far gone, then Juniper has plenty of time and resources. It needs a strong economy, and intelligent leadership.
Regarding both companies, be aware that most companies have cut guidance, and they could further cut guidance. I know we had a round after Q2, but that does not preclude another round of dimmed guidance. This time maybe they will rain on our parades into next year. Still I prefer honesty, because the declines create opportunity once the market overreacts.
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