Juniper Networks (JNPR) is a networking infrastructure company that manufactures the high-end routers used by telecommunications firms and large enterprises to route traffic. The business is essentially a duopoly with Cisco Systems (CSCO). The firm’s business is leveraged to the explosive growth of traffic over the Internet.
Market cap: $12.7 billion; Enterprise Value: $10.5B billion
Note: Market cap and analysis assumes conversion of convertible debt.
The company is estimated to earn $1.15 per share (pro-forma) this year and $1.40 next year. It has $4 of cash per share. The earnings estimates look reasonable, and JNPR usually beats estimates by a penny or two every quarter. The company pro-forma’s out a modest amount of stock compensation. While the stock doesn’t look inexpensive on an earnings multiple basis at $23, one should note that free cash flow significantly exceeds net income due to growth in the deferred revenue balance. In fact, the stock is trading at 17x trailing free cash flow. The company is growing in excess of 20% a year, and should be able to sustain a growth rate in the teens well into the future. JNPR uses part of its cash flow to buy back its stock, and is known to step in aggressively to repurchase stock when it is down. When it reports June quarter results, I would not be surprised to find a big decrease in the share count.
The stock has come down from $28 to $23 in the last month on concern that business is deteriorating at wireline telecom firms in the US, and their purchases of equipment is slowing down. While there is some truth to this, the secular growth of Internet traffic shows no sign of abating. Also, the company’s large deferred revenue balance gives it a lot of cushion.
There are periodically rumors that Juniper could be acquired by a firm like Ericsson, but management is unlikely to sell out unless it is at a huge premium, which will probably make the acquisition unaffordable.
Fair value for JNPR stock: $30 (20x multiple on ‘09 EPS of $1.40 + $2 for excess cash)
Disclosure: Author has a long position in JNPR