One of the sectors that I've enjoyed writing about the most and actually perhaps more than any other sector is technology. And within the collection of technology names there is also a sub-group that I consider to be the most intelligent cluster of all techs - that group happens to be the network equipment makers. We can go into lengthy debates as to why that is, but it likely won't get anywhere. However, what interests me the most, is their respective businesses and how they run.
As similar as they may be in their products and to whom they market, they have taken different approaches toward their current standing. Amongst that group are names such as Cisco (NASDAQ:CSCO), Hewlett-Packard (NYSE:HPQ), Juniper (NYSE:JNPR), F5 (NASDAQ:FFIV) and Brocade (NASDAQ:BRCD). For quite some time now, Cisco has been considered the gold standard among that group - however there is reason to suspect that the competition for that title is no longer a foregone conclusion. During that same period, I have been an unabashed cheerleader of Cisco's and I don't think that I will change my current bullish views especially now when the company has appeared to have turned the corner.
However, I am inclined to look at the entire sector to start to appreciate a little bit more what each company has to offer. Since I have been long Cisco for almost a decade, this will also help lessen the bias that I have established toward its peers. So as much as this article is for you the reader, there is also a selfish motivation for my writing it. Hopefully the end result is that you would have learned something while at the same time allowing me to appreciate more of the competition.
For Juniper, the important question continues to surround the overall health of its business. In January, the company announced that fourth-quarter results were going to fall short of Wall Street expectations. The company guided revenue down to $1.11 billion and 26 cents per share instead of the $1.19 billion and 34 cents that analysts had been expecting. The unfortunate thing for Juniper was that this was to log the third consecutive quarter of shareholder disappointment. The company added that weak U.S. demand and unexpected slow growth contributed to the decline in sales while at the same time suggesting that it had a "record year" in 2011.
The good thing is that by pre-announcing the softer numbers, the company did accomplish its goals of making a soft landing when the actual numbers were released. As it warned, net revenue for the fourth quarter of 2011 decreased 6% on a year-over-year basis, and increased 1% sequentially, to $1,120.8 million. For the year ended December 31, 2011, its revenue increased 9% on a year-over-year basis to $4,448.7 million while posting a GAAP net income of $96.2 million, or $0.18 per diluted share. All in all, the number were decent, not the disaster that it was projected to be. But it begs the question, does management truly have a grasp on the company if it has missed for three straight quarters?
There is cause for optimism however. The company has an array of new products coming out as it continues to position itself to steal share from the rest of the group. One of these products is called the EX6200 and according to the current reviews, it has the potential to be a game-changer for the company by bringing together various intelligent features into one. As great as that product can potentially be, Juniper's challenge will continue to be finding ways to grow and creating the sort of momentum needed by tech companies to inspire investors to believe. I suppose it really has three challenges.
F5 is one company that always seems as if it has its act together. The stock is by far the most expensive among the group from a valuation standpoint as well as by virtue of its P/E ratio. There are high growth expectations placed on this company, but remarkably it has yet to give investors a reason to doubt that they can be reached.
The company recently reported fiscal first-quarter earnings and both its results as well as guidance was in the range that made analysts happy. The company reported a 2 percent increase in revenue from the prior quarter while netting an increase of 20 percent from the previous year. Product revenue was somewhat of a minor disappointment while software revenue climbed 7 percent.
Clearly management knows what it is doing, investors are happy and analysts are ecstatic. So what is the problem? Well for starters and as mentioned above, the stock continues to be a tough one to figure out. What is its true value and what makes the company worthy of such an enormous P/E? As well as the company is performing and has been performing, it is hard to recommend the stock at these levels.
It's hard to imagine a discussion involving network equipment gear and HP is included. Ever since it acquired 3COM several years ago, the company has more than held its own in that market. This is despite its recent revolving door at the CEO office. But there's a lot to like about the company at this juncture. Most recently, HP reported its Q4 2011 earnings results and what I can describe as a "decent quarter." But more importantly, while listening to the call, it was clear that its new CEO, Meg Whitman had established a firm grasp on the company and understands its weaknesses unlike her predecessor.
Admittedly there are some glaring problems, but they are also correctable. For starters, HP reported Q4 non-GAAP net revenue of $32.3 billion, which was down 3 percent from the same quarter in 2010. The company also posted non-GAAP diluted earnings per share of $1.17. Analysts had been expecting the company to post earnings of $1.13 a share on revenue of $32.05 billion. Full year fiscal 2011 GAAP net revenue for the fiscal year 2011 was $127.2 billion, up a modest 1 percent compared with the prior year. Non-GAAP net revenue for the full fiscal year 2011 was $127.4 billion, also up 1 percent compared with the prior year.
With still almost 20 percent upside remaining in terms of price target, HP still definitely has some value and I would buy ahead of earnings. The company is taking a new strategic direction - one that I think makes perfect sense. But investors must not make the mistake of expecting an immediate turnaround. This is going to take some time to realize. As bad as things once looked for this company with it indecision regarding its PCs and tablet initiatives, investors should be comfortable in its new leadership and the fact that it has indeed turned the corner.
Brocade is another interesting story and one that I have recently become enamored with. In its recent Q4 earnings announcement, not only did it beat its projected numbers but it also raised guidance. The question is though, what did it prove? But that is not to take away from the many accomplishments that it has logged this year, especially considering the market's early reaction to its once perceived inability to compete.
Looking at it from a bearish lens, Brocade's Q4 numbers were far from stellar. The company reported flat revenue on a year-over-year basis and less than 10 percent sequential. Revenue for its network storage service was down 4 percent from the previous year, but this was offset with an 11 percent growth from smaller areas of its business - notably IP. But regardless of how one looks at it, it can't be discounted that it did beat consensus estimates on both year-over-year declines and its end of range. To top it off, profitability was a huge plus.
In 2008, the company acquired one of its competitors, Foundry Networks. That was an acquisition that seems to now be paying off. In the deal, management sought to broaden the company a little bit more and place less dependency on its storage business. The other advantage was it wanted to be able to sell networking gear to its existing customer base to provide the services of a one-stop shop, a strategy that is now proven to have worked or at the very least, currently working. Brocade continues to prove that it can do just fine with a small piece of the market pie for now, but there is no denying that it is hungry for a bigger slice.
Disclosure: I am long CSCO.