Juniper Needs Better Diversification to Create Long-Term Value

NEW YORK (TheStreet) – Shares of enterprise company Juniper Networks (JNPR) are under attack.

Trading around $23, shares are up 2% for the year to date, 6% for the past 52 weeks but down 15% over the past five years.

There's a reason why this company has grossly underperformed the likes of Cisco (CSCO) and Ciena (CIEN) within the enterprise: Juniper is not as well diversified, which was a glaring issue in its financial results reported Tuesday.

Investors who place the wrong bet are now hoping for a quick bounce. But it's not going to happen.

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On their own, Juniper's numbers weren't that bad. Revenue grew 7% year over year to $1.23 billion. The company delivered an impressive 38% growth in adjusted earnings, delivering 40 cents per share. That was good enough for a beat of 2 cents a share. But that's where the good news ended. The market is looking forward, not backward.

To that end, Juniper's outlook, which missed both revenue and earnings estimates, spooked investors.

For the October quarter, management guided for revenue in the range of $1.15 billion to $1.20 billion. The high end of that range is still roughly 5% short of what analysts expected. This means that earnings will be under pressure. Analysts were looking for 44 cents per share. Management guided 9% miss on the high end, or 40 cents per share.

Emails sent to management requesting additional color on the guidance were not immediately returned.

But the way I see it, this lack of confidence suggests that Juniper won't win any big deals in the quarters ahead. The problem has to do with the company's over-reliance on carrier spending. Like both Cisco and Ciena, Juniper needs the likes of AT&T (T) and Verizon (VZ) to spend on infrastructure and network builds.

But unlike Cisco and Ciena, Juniper doesn't have reliable alternative sources of revenue. That more than two-thirds of its revenue comes from carriers presents considerable risk.

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Consider, AT&T is not going to overspend on its infrastructure until it knows that its proposed offer of $48.5 billion for DirecTV (DTV) is in the bag. It's just good business.

For that matter, this is the same case for other telecommunication giants including Level 3 (LVLT) and Comcast (CMCSA) that have M&A deals on the table.

While speaking with analyst, Shaygan Kheradpir, Juniper's CEO remained positive about the company's long-term future, saying:

"While this [telecom M&A activity] will impact our near-term outlook, we are well positioned with these customers with major design wins in key areas of their network including next generation projects."

From my vantage point, there is still too much risk with Juniper, especially without knowing if/when these carrier M&A deals will close. Secondly, the company needs to do a better jobs of diversifying its product/service portfolio.

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Finally, the company must develop a stronger presence in the enterprise for these shares to work long-term. Although the stock may see a bounce from this week's beating, the risks will outweigh the reward until these issued are addressed.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates JUNIPER NETWORKS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate JUNIPER NETWORKS INC (JNPR) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, impressive record of earnings per share growth and compelling growth in net income. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • JNPR's revenue growth has slightly outpaced the industry average of 2.0%. Since the same quarter one year prior, revenues slightly increased by 6.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although JNPR's debt-to-equity ratio of 0.20 is very low, it is currently higher than that of the industry average. To add to this, JNPR has a quick ratio of 2.02, which demonstrates the ability of the company to cover short-term liquidity needs.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
  • JUNIPER NETWORKS INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, JUNIPER NETWORKS INC increased its bottom line by earning $0.86 versus $0.36 in the prior year. This year, the market expects an improvement in earnings ($1.62 versus $0.86).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Communications Equipment industry. The net income increased by 125.8% when compared to the same quarter one year prior, rising from $97.90 million to $221.10 million.

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