Juniper Networks: Poised For Growth

| About: Juniper Networks (JNPR)

Summary

Investment in cloud technologies is set to grow in the near future.

With its newest products, Juniper Networks is set to take advantage of this.

The stock price is undervalued, given the upward earnings revisions and a modest valuation.

The hardware and communication equipment industry is set to grow as companies spend more money to build out their cloud services and internet of things.

A company in this space that I think is ideally positioned to take advantage of this is Juniper Networks (NYSE:JNPR). Given its most recent earnings report, there is evidence it is going to see growth in earnings. The stock price has a low valuation given these prospects. I am looking to buy the stock.

Communications and Networking Growth

The amount spent on communication and networking is set to grow over the next several years. Companies are moving their computing to the cloud. Therefore, service providers are beefing up this side of their business. This includes heavyweights such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), AT&T (NYSE:T) and Verizon (NYSE:VZ).

The beneficiaries of this spending will be companies that cater to the type of networking equipment these companies need. They want to have software defined networks, or SDNs, which gives them the ability to aggregate resources and have more agility in scaling their networks.

Juniper Networks Business

Juniper reported earnings at the end of October. It earned $0.58 a share, adjusted for one-time gains and costs, on revenue of $1.29B, beating estimates for both numbers. Revenue was up about 2.4%. However, earnings were down 11% from last year. The company reaffirmed guidance on earnings and revenue for the current year.

Juniper breaks out revenue into four areas; routing, switching, security and services.

The router products are the biggest revenue generator and what the company was founded on. Revenue in that area increased from $604.4 million in the third quarter 2015 to $620.2 million this quarter, driven by an increase in sales of its PTX products. The PTX line is a series of high-performance routers. The demand for these products was driven by cloud providers and Juniper's next-generation IP products. The increase in that revenue was partially offset by lower revenue from other router products.

Next is switching. Revenue was up from $201.4 million from a quarter a year ago to $222.5 million this quarter. This includes a 50% rise in sales of its QFX line. These are high-performance switches designed to be used in next-generation IP data centers. They have connectivity up to 100GbE. They are often used when deploying Contrail Orchestration, which I will talk more about below.

Security products revenue decreased from $119.6 million in the third quarter of 2015 to $85.5 million in this one. This was because of lower revenue from the company's Branch and High-End SRX products and a decline in revenue from legacy products. Revenue was lower from enterprise, telecom and cloud providers. Juniper says this component of its business is in transition from legacy to new products that were recently introduced, and mentions sales will begin to ramp up here over the next few quarters. There is evidence of that happening. Earlier this week, Juniper announced that its vMX and vSRX virtual firewalls are available on the AWS Marketplace.

Services went from $323.3 million in last year's third quarter to $357.1 million this one. This was mainly due an increase in maintenance service and renewal and attach rates of support contracts.

Juniper has invested a lot in its SDN offering, where it competes with market leader Cisco (NASDAQ:CSCO), as well as Huawei, VMware (NYSE:VMW), Hewlett Packard (NYSE:HPE) and others.

Juniper has been making inroads in this market, with its Contrail line. This is Juniper's product for setting up virtual networks using SDN. It relies on open source and is used a lot by data centers setting up cloud solutions.

A lot of the increase in sales in the QFX switches and PTX routers is because of customers implementing a Contrail solution. The switches and routers integrate with their software. This gives Juniper what CEO Rami Rahim describes as "a very compelling end-to-end cloud data center portfolio".

Rami Rahim elaborated a little bit more on the sales strategy, later on when he said:

"I think the most important thing you need to understand as you look at the switching and the cloud opportunity is that we're playing an offensive game. We are out to take share in switching, in data center with a new end-to-end portfolio that is very competitive."

Networking companies selling older technologies, which are not able to capitalize on the building out of data center cloud services, seem to be losing out. On the flip-side, companies that have invested in these technologies like Juniper are winning. Although he does not specifically recommend buying Juniper, Mike Arnold does an excellent job illustrating the shift in this article. He calls it "Telecom 2.0."

My take on Juniper's latest earnings is that this is a company that is gaining traction on servicing the growing part of the networking business. It still has some drag from its legacy products. However, it is set up for growth in the coming year. Juniper had an increase of 24% in deferred revenue y-o-y and a book-to-bill ratio greater than one, indicating more growth to come.

Modest Valuation

Right now, Juniper has a P/E of about 17.25. Juniper earned $1.54 last year and is on track to earn a $1.65 this year, according to consensus estimates. This is the result of estimates being raised.

I believe the wind is at Juniper's back, and there will be more upward revisions, as its competitive advantage becomes clearer. The P/E multiple will expand as a result. The average P/E of an S&P 500 stock is 22. I think Juniper should command at least the market P/E. That would put the price at $33.88 a share (1.54 X 22). It is currently trading at 26.83.

To Summarize

Juniper Networks is poised to grow, as it takes advantage of data centers and enterprises shifting their networks to cloud technologies. The stock is undervalued, considering the prospects. I am looking to buy the stock, with a price target in the low to mid 30s.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JNPR over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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