Networkers Round-Up: Liking Riverstone -- 10:00 AM EST
by Seth Martin
We're taking a look at the network equipment sector as the majority of the companies gear up to report end-of-year results in late January and early February. Overvaluation is still the name of the game when we look at the top of the heap, but farther down there are some possibilities for meaningful stock growth.
Pegging the Networking Stocks Ticker Price 01/03 Mkt. Cap ($bn) P/E CY:02 P/S CY:02 PEG (5yr. PS/G (5yr. P/BV Debt/Equity 3 month %
avg. est.) avg. est.) gain/loss
CSCO $19.97 $146.50 66.56 7.57 2.66 0.303 5.33 0 74%
NT $8.00 $25.67 N/A 1.73 N/A 0.096 3.85 0.77 51%
LU $6.78 $23.18 N/A 1.56 N/A 0.104 2.1 0.4 16%
ALA $18.36 $22.78 N/A 1.26 N/A N/A 2.26 0.81 62%
JNPR $21.71 $7.02 80.41 9.7 2.64 0.318 8.51 1.4 133%
CIEN $15.90 $5.22 N/A 4.75 N/A 0.141 2.45 0.41 67%
RSTN $18.80 $2.19 72.3 7.09 1.81 0.177 5.59 0.44 234%
EXTR $15.39 $1.76 85.5 3.61 2.85 0.12 3.38 0 176%
MONI $1.22 $1.70 N/A N/A N/A N/A 0.254 0 184%
SCMR $5.81 $1.59 N/A 16.99 N/A 0.68 1.37 0 57%
FDRY $9.30 $1.11 42.27 3.14 1.69 0.126 2.98 0 43%
RBAK $5.27 $0.83 N/A 3.82 N/A 0.153 3.56 2.14 339%
FFIV $22.20 $0.55 71.61 4.15 2.2 0.128 5.71 0 160%
AVCI $2.86 $0.14 N/A 2.71 N/A 0.054 0.67 0.02 87%
We've split the group into three, by their respective market caps (large, medium, and small). Of course, these companies specialize in different parts of the network, and some of the fastest-growing members of this group fall near the bottom; Avici [AVCI:Nasdaq], for instance, is expected to growing earnings by 50% each year over the next five years, twice the rate of Cisco [CSCO:Nasdaq].
We are looking to PEG ratios as the best measurement for the group. Our top pick is Riverstone Networks [:Nasdaq], for reasons detailed below, and for its best-in-group PEG of 1.81. We rate Cisco at Neutral, and we are slightly more positive on Juniper [JNPR:Nasdaq] than on Cisco, given that their valuations are roughly the same but next-generation technologies from Juniper (its expected 320 Gbit/sec router, code-named "Gibson" by competitors) should allow it to capture market share. We have a negative bias toward NT, LU and ALA.
Riverstone was spun off from Cabletron Systems [CS:NYSE] in February 2001, and in two years of recording its own results, the unit has yet to see a sequential decline in revenues. Riverstone was originally YAGO Systems, a company Cabletron acquired in 1998. The focus is on metropolitan area networks (MANs). Riverstone's engineering team carries members responsible for inventing the massively beneficial technology of Ethernet Switching, a sign of depth in its product development capabilities.
A relatively straightforward line of products (12 different line cards, or Internet switching ports, and six different metro routers) is nonetheless comprehensive for metro solutions. One-third of sales are international, providing Riverstone with some stability versus companies heavily invested in North America - in the company's recently reported Q3, international sales rose 24% while US sales fell 6%.
The latest OC-192 products, the RS 16000 and RS 38000, are nearing full production levels and should keep gross margins above 55% for the foreseeable future.
After a 15% surge Thursday, we are sad to say that some of the immediate upside has dried up. But it's a volatile stock and we think there will be plenty of accumulation points in months to come. We are nevertheless instituting a long-term Buy rating on the stock.
Market Timing From the Technical Desk
Riverstone Networks [RSTN: Nasdaq] is in an intermediate uptrend. It is currently consolidating in a rectangle with resistance at $18.75. A breakout here will take shares up to $20.25 in one to two months. Shares are at $18.81.
Risk Tolerance ****(* Low risk, *****High risk)
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