Cisco's 50% Upside Dwarfs Juniper

| About: Cisco Systems, (CSCO)

In an earlier article here, I argued that Cisco (NASDAQ:CSCO) was meaningfully undervalued and that Juniper Networks (NYSE:JNPR) was a solid "hold". While Cisco has appreciated by 6.6% since then, it has been outperformed more than 1,250 bps by Juniper. Based on my multiples analysis and DCF model, I continue to find that the former will outperform the latter.

From a multiples perspective, Cisco is considerably the cheaper of the two. It trades at a respective 17.2x and 10.3x past and forward earnings while Juniper trades at a respective 25.1x and 18.2x past and forward earnings. Even though both companies are rated a "hold", I am optimistic about Cisco given its conservative management, gains in market share, and improving efficiency. Both firms are rated a "hold" on the Street.

At the first quarter earnings call, Cisco's CEO, John Chambers, noted a strong start to 2012:

"First, we made very solid progress in Q1, both in terms of our results and execution in the first quarter of our 3-year plan. Our performance in Q1 FY '12 exceeded the guidance we provided last quarter, for both revenue and earnings per share. We had record quarterly revenue in Q1 and our revenue grew year-over-year was 5% compared to our guidance of 1% to 4%. Non-GAAP earnings per share were $0.43, again above our expectations. Non-GAAP gross margins were 62.4%, higher than our original expectations, while the non-GAAP product gross margins were 61.3%. Make no mistake about it, our entire company continues to be focused on gross margin improvements.

While revenue and earnings in Q1 were very solid, we were especially pleased with our product order growth year-over-year, of approximately 13%. Overall, product book-to-bill was approximately 1, which is a solid, given the historical Q1 results".

While the partnership with EMC (EMC) and NetApp (NASDAQ:NTAP) will establish a unified data center product that de-risks the business, shifting towards services will help boost margins. In addition, recent indicators over routing and Ethernet switching suggest that it is gaining back lost share.

Consensus estimates for Cisco's EPS forecast that it will grow by 9.3% to $1.77 in 2012 and then by 9% and 10.9% more in the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $1.89, the rough intrinsic value of the stock is $30.24, implying 52.8% upside. Modeling a CAGR of 9.7% for EPS over the next three years and then discounting backwards at a WACC of 9% yields a still-attractive inure of $27.29.

Juniper, on the other hand, is, in my view, overvalued. Of the 31 revisions to EPS estimates, all have gone down for a net change of 4.7%. With that said, the company experienced strong third quarter results in several areas. First, it secured significant design wins that will allow for the creation of new products. Second, mobile internet and cloud computing trends are looking bright despite the broader macro volatility. Third, service provides are continuing to invest in infrastructure. With that said, the company is not as well positioned to weather a double dip as Cisco is given the differing size.

Consensus estimates for Juniper's EPS forecast that it will decline by 7.8% to $1.19 in 2011 and then grow by 9.2% and 18.5% in the following two years. Assuming a multiple of 17x and a conservative 2012 EPS of $1.26, the rough intrinsic value of the stock is $21.42, implying -10.3% downside. Modeling a CAGR of 6.1% for EPS over the next three years and then discounting backwards at a WACC of 9% yields an even smaller figure at $19.76.

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