Juniper Networks May Have Maxed Out

Shares of  Juniper Networks (JNPR) are down 7.6% year to date and down almost 20% in the last year.

At the end of October, Juniper Networks surprised just about everyone with a strong third quarter. The company reported earnings of 58 cents per share, 6 cents better than the consensus estimate of 52 cents per share. Revenue rose 2.9% to $1.29 billion. Non-GAAP operating margin was 24.4%, down 110 basis points from last year.

The stock jumped 5.4% on the news, since investors were anticipating another lackluster quarter. Management said its new products are gaining traction with cloud service providers.

Routing revenue rose 4% to $620 million. The routing business was driven by cloud providers and, to a lesser extent, cable providers.

Switching was up 10% to $222 million. Cloud service providers drove the switching business. It was the third consecutive quarter that data switching was up over 20%. Service revenue was up 10% to $357 million.

Security revenue was down 29% to $86 million.

Gross margins were 62.9%, in line with analysts' estimates, but below the company's target range. Foreign currency and strong competition are hurting margins. Operating margins, however, were 24.4%, better than expected, and were helped by strong expense control.

At the current quote, the stock is trading at only 11 times forward estimates of $2.22, which is in line with Cisco's (CSCO) multiple. (Cisco Systems is a holding in the Action Alerts PLUS charitable trust portfolio.)

It's hard to see Juniper earning a higher multiple on just 4% revenue growth and 7% earnings growth. (And that 7% earnings growth is helped by share buybacks.) The company is suffering from gross margin pressure and constant foreign currency challenges.

I know investors long for the old days when the networking group traded at sky-high multiples, but those days are long gone. If Juniper can show some sales momentum and better gross margins, maybe the stock can catch a slightly higher multiple (perhaps 12 to 13 times), but I'm not convinced.

For now, I would log off Juniper Networks.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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