Cisco Is Clearly Differentiated From Juniper Networks

 | Apr 12, 2016 | 12:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

csco

,

jnpr

,

eric

,

nok

,

alu

,

anet

This commentary was originally sent to Action Alerts PLUS subscribers at 11:24 a.m. ET on Apr. 12, 2016. Click here to learn about this dynamic market information service for active traders.

Shares of Cisco Systems (CSCO) are trading lower today in sympathy with Juniper Networks (JNPR), which pre-announced disappointing first-quarter results after the close on Monday. We are not surprised that the bad news is dragging the broader data networking group lower, and while we do not discount near-term risks around weak Enterprise spending, we view Action Alerts PLUS holding Cisco as a differentiated, diversified asset that is well positioned to absorb any transitory or secular weakness, given its mix shift to high-growth, high-margin areas such as software, cloud and collaboration.

After the close on Monday, Juniper lowered its revenue and earnings guidance for 1Q, attributing the expected miss to weaker-than- anticipated demand in the Enterprises segment and delayed deals with U.S. and European Tier 1 service providers. Juniper has struggled to diversify its business outside of legacy assets associated with mature, "old-tech" markets, and as a result is tethered to any transitory or secular decline in Enterprise switching & routing.

Within these verticals, the company faces increasing competition and strategic isolation. In routing, the company is losing share to Cisco and its partner Ericsson (ERIC) and Nokia (NOK)/Alcatel- Lucent (ALU). In the absence of a strategic partner, Juniper has struggled to scale effectively and compete on pricing. 

In switching, the company is losing share in campus networking as it lacks a strong WLAN partner (which underpins a campus' wireless network). Finally, the company's data center operations are being pressured by Arista Networks (ANET), Cisco and the proliferation of white-box devices (which are low-priced, bare-bones, alternatives to traditional switching). 

Meanwhile, Juniper is struggling to gain traction in security -- which is unsurprising, considering the company announced in December that its operating system firewall had been compromised, leveling a serious blow to its credibility. 

All in, while we do not intend to discount the implication of Juniper's pre-announcement as it relates to high-level Enterprise trends (which suggest networking end markets remain weak), we would highlight two distinguishing factors between Juniper and AAP portfolio holding, Cisco:

1. Within routing, Juniper's product cycle is in its late innings, while Cisco's product cycle is scaling -- meaning the leap-frog effect in market momentum could be tilting to Cisco's advantage; 

2. Cisco is rapidly transforming from an "old-tech" business (routing & switching) to a systems business: A multi-platform company with accelerating software and recurring revenue streams in major categories, including data-center switching, security, and collaboration. We believe the company's strategic focus on next-gen security, cloud infrastructure, automation software, Internet of Things, and broader collaboration provides multiple long-term tailwinds. 

Cisco's mix shift toward software -- which has boosted deferred revenue and lifted operating margins -- should fuel earnings and multiple expansion long-term, while its powerful capital return program (marked by a $15 billion share buyback and industry-high 3.8% dividend yield) pays investors for their interim patience.

 

We reiterate our $30 price target, and while we would not be surprised to see transitory weakness in legacy end-markets in the company's upcoming quarter, we reiterate our high conviction thesis over the long- term.

Columnist Conversations

Today we see buyers of short term volatility going to town, picking up the aug and sept futures in a big way.&...
View Chart »  View in New Window » BA chart I'm STALKING this one for a buy trigger........
View Chart »  View in New Window »   WEEKLY
BABA is still dancing on key weekly support here.  Wait for a trigger! View Chart »  Vi...

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

COLUMNIST TWEETS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.