Profit From the F5 Networks Disconnect
After a selloff shares have about 22% upside and the networking firm remains a leader in the segment.
F5 Networks ( FFIV : Nasdaq)
By Buckingham Research Group ($125.95, Jan. 22, 2015)
We are upgrading F5 Networks to Buy from Neutral and slightly decreasing our price target to $129 from $131, implying about 22% upside from the premarket price [Thursday] of about $106, as we believe an expectation reset offers a compelling opportunity to own a leader in the segment.
F5 delivered a slight miss on the top line and modest beat on earnings per share as some large deals in enterprise and federal government pushed out, likely exacerbated by seasonality in the business. The near-term challenges appear to be confined to North America and in our view are likely to be temporary, with business resuming over the next one to two quarters.
We think growth drivers remain intact, with a broadened security portfolio, new as-a-service solutions, Cisco Systems ( CSCO ) (rated at Neutral, $27 target price) replacements and a long product cycle tail. Additionally, we expect the company to generate healthy free cash flow and opportunistically buy back stock at lower levels with the newly increased repurchase. The risk to the stock remains the increasing mix of software and cannibalization of the core as well as competition, but at an after-market price level of about $106, we think the risks are priced in and the selloff is overdone.
We see valuation as compelling and risk reward favorable (upside to $140/downside to $90). Net-net, we believe the reset offers an opportunity and believe investors should aggressively own one of the top mid-cap growth plays in networking.
Our revised $129 price target (from $131) is based on our calendar 2016 price/earnings multiple analysis. We apply an about 15.8 times P/E multiple on our calendar 2016 cash-adjusted earnings-per-share estimate of $7.15 plus $15.80 in net cash to arrive at our target, which implies about 17.8 times our calendar 2016 EPS estimate of $7.24 unadjusted for cash. Our multiple is in line with the company’s estimated five-year earnings compounded annualized growth rate of about 18%, and slightly below its average forward P/E multiple of about 19 times. We believe the company is the dominant player in the application delivery controllers (ADC) market, with industry-leading margins and ultimately deserves a premium multiple; however, multiple expansion is likely only as the company reinvigorates growth.
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Bulls Contend F5's Issues Just Short-Term
WSJ / Jan 22, 2015
"Weak federal orders and delays in $1M-plus deals" are impacting the near-term environment for F5 Networks (FFIV), but Pacific Crest believes the company "remains one of the highest-quality infrastructure stocks to own for 2015"--even as it cuts its price target to $162 from $141. A soft F2Q view has spooked investors (shares are down 16% premarket at $105.50, which would be an 8-month low). But the investment bank remains "confident in the sustainability of midteens cash-flow growth." Jefferies also thinks current issues "will prove short-term fluctuations as the company's catalysts and competitive positioning remain in place and we see little sign of macro issues." |
