FYI: BARRON'S ONLINE: Juniper Goes To Jupiter
By Eric C. Fleming
Weekday Trader
(This item was originally published late Tuesday).
Forget soaring to the moon with Ralph and Alice Kramden from The
Honeymooners. Juniper Networks' valuations went way beyond that-and they're
still in orbit three years after the tech bubble burst.
While the shares have plunged 96% from their peak of 244.50, they still
trade at more than 200 times estimated 2003 earnings.
That's a huge premium to Juniper's dominant competitor, Cisco Systems, whose
stock changes hands at less than 20 times projected earnings for its fiscal
year ending July 26.
Both Juniper and Cisco make routers, which shuttle packets of data through
corporate and telecommunications networks.
Juniper, which has the edge in turning out new high-end routers while Cisco
mostly updates older wares, has won some battles and some fans on Wall
Street.
But its lofty multiple has attracted some critics as well.
"My real beef [with Juniper] is that it has a huge valuation," says Reginal
King, analyst at W.R. Hambrecht & Co., who rates the stock Sell.
And valuation is the tip of the iceberg.
"You're basically implying a lot of growth and margin expansion in a tough
market," says John Wilson, analyst at RBC Capital Markets, who rates
Juniper's stock Underperform.
The networking equipment maker is struggling to compete in a market that's
still on its back because of weak demand.
"The [telco] service providers are in pretty dire straits, and they're the
ones buying [Juniper's] products," says Giri Devulapally, analyst at T. Rowe
Price & Associates.
Or, in many cases, not buying Juniper's products.
In the fourth quarter, Juniper got about half its sales from core routers
used by telecommunications service providers to move data within their
networks.
Roughly the other half came from so-called "edge routers" that telcos like
China Netcom Corp. use to send data between networks, with some sales to
cable systems operators.
Resellers LM Ericsson and Siemens are among Juniper's biggest clients. Other
customers include Nordic telecom service provider TeliaSonera and Korean and
Chinese telecom companies.
Unfortunately, much of Juniper's customer list reads like telecom's obituary
page, including such has-beens as Qwest Communications International and the
bankrupt WorldCom.
Yet even surviving carriers have slashed spending on telecom equipment
(excluding wireless) by 35% in 2002, notes market research firm Dell`Oro
Group.
And while Juniper recently landed BellSouth as a customer, it's unclear how
big a buyer of gear the regional Bell will turn out to be.
Juniper also may have a tough time slugging it out with Cisco on that turf,
because Cisco has been doing business with the Bells for more than a decade,
says King.
In fact, Juniper generally has been losing ground to Cisco. Juniper's share
of the high-end service provider router market sank to 16.2% last year from
20.1% in 2001, according to market research firm Synergy Research. During
that time, Cisco gained five percentage points of share. It now has a
commanding 70% of the market.
Cisco's breadth of products, wide distribution channel and longstanding
relationships have helped it in these tough times, as customers prefer to
deal with one vendor, says Susan Kalla, analyst at Friedman Billings Ramsey.
"Juniper has a good product at the high end of the market," says King. But
because of Cisco's longstanding relationships with its Bell customers,
"Juniper has a competitive disadvantage."
And it might not even matter if customers' coffers were suddenly overflowing
again.
"The backbone [of networks] was largely upgraded in the last several years,"
says King.
Last year, sales in the worldwide router market dropped by more than a
third, to $2.8 billion, from $4.3 billion, according to Synergy.
And this year, Synegy sees core router sales dropping by 1.7% to $1.2
billion, while sales of edge routers should fall 3.2%, to $1.4 billion.
Also, Juniper is nowhere near as strong financially as Cisco is. Its cash
grew to more than $1 billion at the end of 2002, but Juniper also has $942
million in debt, giving it a 40% debt-to-capital ratio. Cisco has more than
$21 billion in the bank and no debt.
At nearly six times trailing-12-month sales, "[Juniper] is such an easy
short," says Kalla, who rates the stock Underperform. She has been a bear
on telecom-related stocks since 2001.
About 10% of Juniper's float is currently being sold short by investors
betting against the stock.
Juniper officials declined comment.
At its current valuation, Juniper's stock changes hands far above the
company's long-term expected annual earnings growth rate of 15% (see At a
Glance). Its P/E on 2003 estimated earnings even tops its stratospheric
five-year median P/E of 181.8 times forward earnings, according to
Thomson/Baseline.
Of course, if telecom spending does resume and providers upgrade their
networks again, Juniper and Cisco could both prosper.
Don't expect that to happen any time soon, though: Some experts think
telecom spending will remain dead in the water through 2005.
Which is why right now Juniper's valuation looks like a triumph of hope over
reality.
(END) Dow Jones Newswires
03-19-03 0800ET
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