Networking Stocks Goldman Sachs Might Downgrade In 2012

by: Investment Underground

By Tim Plaehn

In a couple of recent reports from Wall Street analysts – namely Goldman Sachs – the 2012 outlook for the network equipment companies could be downgraded and the analysts predicted weaker revenue and profits due reduced capital expenditure – capex – spending by the sector's biggest customers.

The customer base of the networking equipment companies are the services provider companies with the cellular phone and wireless service providers among the biggest buyers of networking equipment. The analyst comments singled out Juniper Networks (NYSE:JNPR) for estimate downgrades. Other stocks in the network equipment sector include Cisco Systems (NASDAQ:CSCO), Netscout Systems (NASDAQ:NTCT), F5 Networks (NASDAQ:FFIV), BroadSoft (NASDAQ:BSFT), Allot Communications (NASDAQ:ALLT) and Radware Ltd. (NASDAQ:RDWR).

Of this group Cisco Systems and Juniper Networks are large-cap stocks, F5 Networks fits into the mid-cap category and Netscout Systems, Allot Communications, Radware and Broadsoft would be categorized as small cap. Changes in the capex spending of the service provider companies could affect the different sized network equipment companies differently. The small-cap companies may be in a product niche where slowing capex will not have much effect. The large-cap companies may be able to take business away from the less financially secure mid-cap companies. Although both Cisco and Juniper Networks are large-cap companies, Cisco is 10 times as large – market value wise – as Juniper.

The Wedbush announcement focused on Juniper Networks, with the analysts lowering both their revenue and net income estimates for 2012. The current 2012 Wall Street consensus estimates for JNPR are revenue of $4.82 billion and net income of $1.34 per share. The Wedbush analysts are predicting sales of $4.74 billion and $1.25 per share. Before the reduction, the Wedbush forecasts were well above the consensus numbers. Although the analysts maintained their neutral rating on Juniper, the target price was lowered to below the current share value. The Goldman Sachs analysts stated that Juniper was probably losing market share in router sales to Cisco.

Capex spending in 2012 from the service provider companies is forecast to decline by 3 percent compared with 2011 levels. As the $100 billion company in the network equipment sector, Cisco Systems will be the bellwether stock. The current Wall Street consensus numbers have the Cisco revenue growing by 5 percent in 2012 and net income increasing by 10 percent. Cisco currently has buy or outperform ratings from the bulk of analysts following the stock. According to a Forbes report, a high level Cisco executive at the Consumer Electronics Show – CES – in Las Vegas stated that the revenue problems of Juniper were not a sector wide problem. We noted recently that Juniper could see some problems in terms of growth.

Investors holding shares of the small-cap network equipment companies should review the types of products the individual companies sell and determine if those products would be affected by a reduction in capex spending by their customer base. If the projected sales growth of one or more of these companies appear to be secure, an overall decline in network equipment stock values due to problems with one or two companies – such as appears to be happening with Juniper – could lead to buying opportunities in the other shares.

On the other hand, the downgrade at Juniper Networks may be the first sign of a broad-based slowing in capex spending on network equipment. Investors should keep an eye on the sales and earnings projections of their favorite stocks in the sector. It could turn out that 2012 will be a rough year for selling network equipment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.