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In this article, we will look at four network equipment providers. The companies are Cisco Systems Inc. (NASDAQ:CSCO), Hewlett-Packard Company (NYSE:HPQ), Juniper Networks (NYSE:JNPR) and Alcatel-Lucent (NYSE:ALU). We will look at some valuation and fundamental performance measures along with industry trends to see which might emerge as a winner in 2013.

Tracking Financials

Here are the four companies for our analysis:

Cisco Systems

Hewlett-Packard

Juniper Networks

Alcatel-Lucent

Market Cap

$112.3 bil

$33.1 bil

$11.6 bil

$3.9 bil

Price/Earnings

13.6

N/A

64.1

N/A

Price/Sales

2.4

0.3

2.8

0.2

Price/Book

2.1

1.5

1.6

1.5

Forward P/E

10.2

4.6

19.19

N/A

5 Year Growth Forecast

3.6%

-9.6%

11.4%

10%

Dividend Yield

2.08%

3.04%

--

--

ROE

16.7%

-41.43

2.7%

36.3%

Operating Margin

22.5

-9.2%

7.1%

-4.7%

Debt/Equity

0.31

0.8

0.1

--

Current Price

$21.13

$17.05

$22.61

$1.76

Data from Morningstar and Finviz on January 28, 2013

What Does 2013 Have in Store for the Networking and Communication Equipment Industry?

With the continued economic uncertainty coming out of the U.S., Europe, and China over the past two years, enterprise spending has suffered. However, things may be looking up. A research report issued by IT research firm Gartner Inc. on January 3, 2013, forecasts a 4.2% rise in overall IT spending for 2013. In the U.S. alone, major wireless carrier AT&T is planning a $14 billion investment in network expansion spending.

An increase in enterprise spending could accelerate several major trends already in place. These include the continuing transition from wired to wireless networks, increased data demand for both mobile and wired networks, and expanding opportunities for cloud computing providers.

Industry leader Cisco Systems announced positive results in its November 2012 release of first-quarter earnings for 2013. The company posted across the board increases. Net sales were up 6%; net income increased 11%; and earnings per share increase 12%. These results should serve to confirm the success of the company's efforts to turn itself around through restructuring, cost cutting, and better product focus. Analysts are mixed on where Cisco is going from here.

On January 14, 2013, an analyst at William Blair upgraded Cisco from Market Perform to Outperform, expressing the opinion the company had successfully emerged from its turnaround. A mere three days later an analyst at JP Morgan downgraded Cisco from Neutral to Underweight, cutting the price target by $2.00. The analyst citied Cisco's huge exposure to enterprise spending, which the analyst fears could decline in 2013

Despite an increase in the stock price of about 20% since the November earnings release, the company still looks relatively cheap with a trailing P/E of 13.6 and a P/B ratio of 2.1, under the benchmark 3.0 favored by most value investors.

Hewlett-Packard is primarily a computer systems provider. While Cisco, Juniper and Alcatel-Lucent are all in the Communications Equipment industry classification of the Technology sector, HPQ is classified as a Computer Systems provider.

However, the company does operate in the enterprise sector and former CEO Leo Apotheker was actually considering shedding HP's huge PC operations to focus more on the company's business segment, including network servers. Investors took a dim view of this strategy, driving down the already battered stock price another 9%.

The episode captures the essential risk of investing in Hewlett-Packard. Corporate management appears unable to come up with a turn-around strategy. When Apotheker took the reins he expressed the view that its consumer business gave HP a "competitive advantage." HP has a new CEO, Meg Whitman formerly of eBay, and the comeback has yet to begin.

Juniper Networks is the second-largest networking company in the U.S. The company trails industry leader Cisco in more than market share. Operating margins and return on equity are substantially lower and the bulging trailing P/E of 64.1 makes the stock appear over-priced. Juniper will release earnings on January 24, and analysts have low expectations. Estimates call for a 0.6% revenue increase and a 14.2% drop in earnings per share.

Despite the company's less than stellar performance in recent times, analyst opinion is decidedly mixed on this stock. According to a recent post on Internet website the Jags Report, Juniper currently has 12 analysts with Buy recommendations, 27 with Hold recommendations, one at Underweight and only one with a Sell rating.

Juniper is betting its future on entering the SDN (Software Defined Networking) space to compete with Cisco. SDN is generating a lot of buzz in the tech sphere as it is a genuine threat to traditional hardware controlled networking. With SDN, software programs are in control. Investors willing to take a risk on Juniper should be aware Cisco is also entering the SDN space.

According to Finviz.com, Alcatel-Lucent has a debt-to-equity ratio of 1.14, or 114%. That number alone should turn all but the riverboat gambler away from considering putting cash on the table for this stock. There are different views right now about the future of enterprise spending. The Bulls see improving conditions in the U.S. and lack of more negative news from the eurozone as supporting evidence for better days ahead. Bears point out macroeconomic conditions could deteriorate on a number of fronts. One thing is certain. Companies with high debt can have trouble surviving tough times.

The company got a much needed boost in December of 2012 when it obtained over 1.6 billion euro [$2.16 billion] in secured credit facilities from Goldman Sachs and Credit Suisse. At best, this provides Alcatel with breathing space and perhaps makes it a more attractive takeover target.

Final Verdict

The safe play here is industry leader Cisco, with its high operating margins, respectable return on equity, and solid dividend yield. Investors who believe Hewlett-Packard's storied past make it a potential target need to closely monitor the CEO's latest comeback plan. Similarly, investors need to track the progress of Juniper's SDN efforts. Finally, Alcatel-Lucent management laid out a specific comeback plan in November of 2012, which can be monitored by investors willing to invest the time and effort.

Source: Which Network Equipment Provider Will Be A Winning Bet In 2013?