Top 5 Tech Stocks for Fall 2012 - #2 F5 Networks

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We are building our list of Top 5 Tech Stocks for Fall 2012 at both The Motley Fool and Fastball Financial.  So far, we've covered Accenture (ACN), SalesForce.com (CRM) and Rackspace (RAX).  Of those three, only SalesForce.com is returning from our 2011 list.

The other returning stock is F5 Networks (NASDAQ: FFIV).  F5 provides solutions that optimize and secure networks.  In their words: "With F5 solutions in place, businesses gain strategic points of control wherever information is exchanged, from client devices and the network to application servers, data storage, and everything in between." 

As you can see from the chart below, F5 has had a rough year thus far.  However, you’ll also see that they had a similar rough time early in 2011, but recovered mightily in the fall.  In fact, it produced a 31.3% return for our Top 5 Tech Stocks for 2011!!  That’s why we brought it back for another round in the fall of 2012.

Valuation

F5 certainly isn’t cheap at a Price-to-Earnings-to-Growth (PEG) ratio of 1.2.  That’s not overly expensive but not quite as cheap as it was in 2011. However,  it is still a fair enough value to jump in and catch the opportunity from the sell-off. 

Cash Flow

F5’s cash flow varies by quarter.  Generally the fourth quarter is the highest and the cash flow drops off in the following quarter.  However, the chart shows the positive trend of F5’s cash flow regardless of the month-to-month fluctuations.  Lots of items can affect a quarterly cash flow (AR, AP, deferred revenue, etc.), but a healthy trend is undeniable.  Their cash flow from operations have well more than doubled in the past four years.

Return on Equity

An important metric to follow is Return on Equity (ROE).  {See Accenture discussion for ROE explanation}. F5’s ROE has soared higher to a healthy 23.2%, yet another sign F5 is doing well creating additional shareholder value.

Competition

F5's biggest competitors are:

  • Citrix (NASDAQ: CTXS) - uses virtualization systems to deliver IT services on-demand and offers datacenter and cloud solutions that compete more directly with F5.  Its P/E of 42 and PEG of 1.6 aren't cheap either.  It's a solid stock for sure, but if you're looking for a more pure cloud and datacenter play, F5 is the way to go.
  • Juniper Networks (NYSE: JNPR) - is also a play on network infrastructure.  Like Citrix, with a P/E of 38.6 and a PEG of 1.7, why go with Juniper when best of breed F5 Networks is available at a lower PEG?
  • Cisco (NASDAQ: CSCO) - is obviously a much larger company at a $100 billion market cap with a much longer history.  Cisco makes networking and other communications and IT equipment on a huge scale.  Interestingly, Cisco recently backed out of the market for application delivery products because it isn't one of the market leaders in this area and has many other business lines to focus on.  This should directly benefit F5 Networks and is likely the cause of F5's recent stock price increase.

Risks

During 2011, the big risk for F5 was Japan following the earthquake and tsunami.  Japan’s economy took a huge hit and investors worried that F5 could not overcome that decrease in business.  The chart shows how well F5 responded to those worries, with the stock price increasing dramatically last fall.

For 2012, the concern has shifted to Europe.  That economy is clearly hurting and investors again worry that F5 won’t be able to overcome that demand decrease.

Bottom Line

F5 is growing rapidly and is on sale from worries of a struggling economy, particularly in Europe.  It’s a familiar story that turned out well last time.


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