Juniper Networks Can Reconnect With Investors

 | Apr 25, 2017 | 2:30 PM EDT
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Juniper Networks (JNPR) , whose shares are up just 0.4% year to date, is scheduled to report first-quarter earnings after the bell. Can Juniper still connect with investors?

Back on Jan. 30, I thought investors should buy Juniper on weakness, after the company guided to a soft first quarter. Investors were disappointed and the stock got hammered. Since my recommendation, the stock is up 6%.

The first quarter is seasonally weak, but business should pick up throughout the year.

Management guided first-quarter sales between $1.17 billion to $1.23 billion. The company sees gross margins of 62%-63% and an operating margin of 19.5%, which works out to $0.46 per share. Analysts were looking for sales of $1.24 billion and earnings of $0.49.

The stock was hit on the poor margin outlook, but as new products roll out, margins should bounce back. Last year, for example, Juniper had a first-quarter operating margin of 19.3% and margins ramped sequentially all year. The same pattern should repeat this year. The company ended 2016 with a non-GAAP operating margin of 23.4%, slightly lower than 24.0% in 2015.

Last year, total revenue grew just 3% to $4.99 billion, but this year revenue growth should get back on track. In 2016, product revenue dropped 1%, while service revenue surged 12.9%.

This year should be more balanced. For example, analysts expect product revenue to grow around 3% to $3.7 billion, while service revenue will likely be up about 6% or 7% to $1.5 billion, according to analysts. That means total 2017 revenue should be up at least 4%. With a little help from margins, Juniper could report earnings of $2.20 per share. Next year, analysts are looking for EPS of $2.34.

In terms of product revenue, Juniper is facing easy comparisons. The first quarter of 2015, product revenue was down 12.8% and then fell another 1.5% in 2016. This year, analysts project first-quarter product revenue to be up 8%.

In 2015, first-quarter revenue fell 8.8% and it was up just 2.9% in 2016. Based on the company's guidance, revenue will be up about 9%.

Investors are looking for first-quarter sales of $1.2 billion and EPS of $0.42.

The second quarter looks like it will face easy comparisons too. Product revenue fell 3.2% and 4.2% in 2015 and 2016, respectively. According to analysts, product revenue should grow about 4% in the second quarter.

Given these trends, Juniper should be able to (finally) grow net income. Last year, net income fell 5%. Considering the improvement investors anticipate, net income is expected to be up between 4% and 5% this year. Analysts are already looking for about 6% net income growth in 2018.

Add it all up and I think Juniper can put together a decent year. If I'm right, a better first half should be able to get the stock higher. Right now, the stock is trading at only 13x 2017 consensus EPS estimates ($2.19) and just 12x ($2.34) 2018 estimates.

Historically, JNPR trades between 13x and 20x, so it's not out of the question to get back to the middle of the range as the company puts an ugly 2016 behind it. Some decent first-half earnings momentum should be able to get the stock into the low-to-mid $30s or about 14-15x 2018 estimates. I think Juniper can reconnect with investors.

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