By Chris Bulkey, principal analyst at Technology Research Group

Clarification from author: In our 1Q10 earnings report, we stated that the root cause of Juniper's problems is a disruptive and highly dilutive series of acquisitions. The buying spree commenced in 1999, gained momentum in 1H04, and came to a sudden stop in 4Q05. This statement was excluded from our 1Q10 report for the sake of brevity, but is important. The point we are making is that the damage had already been done. The series of high multiple acquisitions diluted equity big time. Comment about being disruptive refers to restructuring charges, asset impairments and intangible amortization that followed. The net effect of equity dilution and recurring charges can be seen in a persistently inadequate return on equity.

NEW YORK ( TheStreet) - Juniper ( JNPR - Get Report) reported revenue of $913 million (up 19% year on year) and pro forma earnings of $0.27 per share for the first quarter of 2010 (TRG estimates - $904 million and $0.25 per share). GAAP net income came in at $0.30 per share including a non-recurring tax benefit of $0.10 per share.

Top-line growth is being driven by previous acquisitions as reflected in an elevated goodwill balance (48% of total assets). Ongoing restructuring measures, R&D reduction, tax benefit, and amortization of purchased intangibles call earnings quality into question.

A highly irregular cash flow progression and depressed return on equity aggravate an unfavorable assessment. Cash flow plummeted 46% year on year and was decidedly uncorrelated with net income, which improved to $163 million from a loss in the year-ago period. Return on equity for the trailing four quarters (in GAAP terms) is a mere2%. This reflects substantial use of cost containment measures to stabilize expense levels and results in a feeble sustainable growth rate. The root cause of Juniper's problems is a disruptive and highly dilutive series of acquisitions.

Valuation and Recommendation

Shares are up 17% year to date and valued at 144 times trailing GAAP earnings. IP routing competitor Cisco Systems ( CSCO - Get Report), rated sell, trades at roughly 26 times. Cisco is not without concerns, but has less distressed financials and fewer earnings quality irregularities. Another factor that bodes poorly for Juniper is an unhealthy variance between pro forma and fully expensed (GAAP) earnings expectations (i.e., consensus GAAP estimate is 18% and 14% below pro forma for 2010 and 2011 respectively).

We reiterate a sell rating and $22 price objective on Juniper (target multiple remains 20 times 2010 EPS estimate).

--- Written by Chris Bulkey in Narberth, PA