According to GuruFocus Real Time Picks, on March 12, Paul Singer (Trades, Portfolio), the founder and CEO of $20 billion hedge fund Elliott Management Corp. added Juniper Networks Inc. (JNPR, Financial), at an average price of $25.39 and currently holds 23,995,185 shares of the stock, worth 12.51% of his portfolio.
So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity when consumption of network capacity is increasing and tablets and smartphones are well positioned to be the growth drivers for the industry.
Increasingly Attracting Customers
Juniper Networks designs, develops and sells products and services that serve the networking requirements of service providers, enterprises,governments and research and public sector organizations. According to the technology research firm IDC, a new study says the market for big data technology and services is expected to grow. The firm believes that this market will exceed $50 billion by 2017.
The firm has strategic reseller relationships with Nokia Siemens Networks, Ericsson AB, and International Business Machines (IBM, Financial), allowing for the resale of its products throughout the entire world, in a non-exclusive basis, providing for discounts based on volume. With the idea of international expansion, the company has worked with more than 9,000 channel partners to reach customers. Partnerships with Avaya Inc., Microsoft Corporation (MSFT, Financial), NEC (NIPNF, Financial) and Symantec Corporation (SYMC, Financial) and the Original Equipment Manufacturer (OEM, Financial) agreement with IBM are considered to be key strategic moves for the upcoming years.
Small Acquisitions
Juniper Networks expanded its product portfolioby making acquisitions. Mykonos Software, a web security software company, BitGravity, source code license, patent joint-ownership and employees related to the service management layer of BitGravity's Content Delivery Network technology, for $13 million; and Conrail Systems, a software networking company providing SDN solutions technology. These acquisitions accelerate the entry into specific markets.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 29.7x, trading at a premium compared to an average of 21.3x for the industry. To use another metric, its price-to-book ratio of 1.80x indicates a discount versus the industry average of 1.95x and the price-to-sales ratio of 2.80x is above the industry average of 1.27x. Two metrics indicate that the stock is relatively overvalued relative to its peers.
Earnings per share (EPS) increased by 57.89% in the most recent quarter compared to the same quarter a year ago ($0.30 versus $0.19). We include in the next graph the stock price because EPS often lead the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. With an ROE of 6.02%, Juniper is above the industry mean of 5.60% and competitors such as Alcatel-Lucent (ALU). But for investors looking for a huge ROE, Cisco Systems Inc. (CSCO) is an appropriate option with a ratio of 82.64%.
Final Comment
Juniper's revenue growth was positive with reasonable debt levels. Also, I expect the positive trend to continue in earnings per share. Juniper should benefit from the growing demand for the networking products and services. The stock price increased by almost 30% over the past year, which is really good for investors seeking capital appreciation.
I would recommend investors to consider adding the stock for their long-term portfolios. The firm currently has a Zacks Rank #1 (Strong Buy) and upgraded their long-term recommendation from Neutral to Outperform. Hedge fund gurus have also been active in the company in Q4 2013. Charles Brandes (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) have taken long positions in the stock.
Disclosure: Victor Selva holds no position in any stocks mentioned.
