Juniper Networks: Why the Stock Could Climb 30% or More
With a big hedge fund pushing for change, the former dot-com darling may have big upside.
It's not easy being an activist investor, when some of your best efforts produce only middling responses. Case in point, the trading in Juniper Networks, which in January attracted the attention of Elliott Management, a $25 billion multi-strategy hedge fund.
The stock (ticker: JNPR) is up a mere 6% this year, at a recent $24, less than the Standard & Poor's 500's return thus far -- this despite the fact that Elliott, and the many investors it has canvassed in the last year or so, believe they have set in motion substantial change for the better.
After Elliott got involved with Juniper on Jan. 13, the firm continued to buy and now owns 8.3% of Juniper, worth $1 billion.
Staffed by ex-employees of Cisco Systems (CSCO) at its launch in 1996, Juniper was supposed to give the networking giant a serious run for its money. It managed to grab some market share in "core routing," the fastest, most powerful equipment running telecom carrier networks.
However, growth started to slow after the company reached about $2 billion in revenue in 2005. Growth fell to 9% in 2011 from 23%, the year before, as its expansion into other lines of business, such as corporate switching gear, didn't pay off.
In January, CEO Kevin Johnson stepped down after 5½ years at the helm. He was replaced with Shaygan Kheradpir, formerly chief technical officer at Barclays.
Revenue actually declined in 2012, by 2%, before reboundingto a measly 7% growth last year, with the same estimated for this year.
Juniper will report second-quarter results on Tuesday, and investors will have a chance to scrutinize progress on its so-called integrated operating plan -- the restructuring plan that was unveiled in February, after Elliott got involved.
The plan includes pursuing an accelerated stock repurchase plan that is expected to reach $3 billion, or more than a quarter of its market cap; its operating profit margin is to hit the mid-20% level, from 12.1% last year. Elliott believes revenue growth could rise from 7% last year.
Add in the promised 10 cent-per-share quarterly dividend -- for a 1.6% yield -- and it would seem to the folks at Elliott to be worth more than 12 times forward earnings.
THAT PIDDLY 6% STOCK appreciation causes a bit of consternation to Elliott, and specifically to Jesse Cohn, a portfolio manager at Elliott in charge of activism in U.S. stocks. With 30 different campaigns under his belt, Cohn's reputation should be enough for investors.
In 2012, Elliott took a stake in BMC Software, a maker of mainframe computer software tools, when it was trading in the mid-$30s. Elliott coaxed the company into putting itself up for sale. The end result was a buyout by Bain Capital and Golden Gate Capital a year later at $46.25 per share.
Cohn says Juniper's numbers should speak for themselves. The stock multiple is lower now in inverse proportion to a brightened financial outlook.
A year ago at this time, he notes, the estimate for 2015 earnings was not the current $2 a share but $1.42. The stock had a higher forward multiple of 15.
"With the stock today at $24, it trades at 10 times earnings, excluding net cash, and it's cheaper than it's ever been," Cohn observes.
"This is despite the fact that it is a better company than it has been for years, with superior revenue diversity, significant strategic relevance and a clear operating plan," he adds.
Cohn sees upside to $32, based on that $2 per share, assuming the stock gets back to its favored multiple.
The problem, however, may be convincing anyone that real change has or will ever happen.
One Juniper investor I spoke to who endorses Cohn's view observes a lot of momentum traders have moved on. "The initial excitement has faded after the whole thing caught the Street by surprise," meaning, Elliott's appearance on the scene, he says.
"The people who were on the sidelines or who were skeptical to begin with about Juniper, a lot of them said, 'That's all fine and dandy, but now that the restructuring plan's out, what is the next catalyst?' "
THIS MAY BE A PROBLEM in general for activist efforts.
I noted in this column back in May, a study by S&P Capital IQ looking at hundreds of firms that were the target of activist investors found lots of evidence shares rose, but in general no improvement to those firm's financial operations. ("Quarterly Results Giveth, but Mostly Taketh Away," May 5.)
Many investors, then, may not really believe change is possible, they're simply betting on stock movements.
There is reason for skepticism: The whole world of networking is being thrown upside down by cloud computing, with software in some cases replacing networking equipment.
Cohn and others make the argument there are plenty of good things that can happen. The investor I talked with opines that revenue growth can be better than the published estimate this year, perhaps as high as 10%, as Juniper rides a rising tide of telco spending on routing.
In fact, Juniper's own technology for cloud computing, called "QFabric," is catching on with some very large customers, including UBS, the investor says.
What's more, the company's $900 million in annual revenue from security products is in a hot area.
FireEye (FEYE), the security tech firm that came public last September, fetches almost 12 times projected revenue despite being expected to lose money for years to come.
"A separation of security makes sense," says Cohn. "We have received a number of inbound calls from strategic and financial buyers who would be interested in talking to Juniper about the asset."
Then, too, value investors are calling, Cohn says, suggesting that the stock buybacks and the dividend may be able to attract a new crowd beyond just the growth and momentum folks.
It remains to be seen if real change can happen at Juniper, a former darling that now gropes for relevance. Certainly, as Cohn notes, the valuation makes it an intriguing bet.