F5 Is Still Alive
[ from Barrons - the Trader column - 01/31/14]
The market’s volatile gyrations of recent weeks have given investors fits, but Mr. Market’s short-term emotional outbursts occasionally offer a second bite at a tasty apple, like F5 Networks (FFIV).
Recently, the $8 billion market-cap company reported that revenue rose 14% in its fiscal first quarter, ended December, to $463 million from the year-earlier period. Net income was $89 million or $1.21, up sharply from $68 million or 87 cents.
What’s not to like? Well, the market found plenty, and the stock is off about 15% from its high, closing at $111.62 Friday.
Sales were below analyst expectations, a rare miss for this Seattle-based maker of “application-delivery controllers,” or ADC boxes, hardware that optimizes delivery of data across servers and storage devices for corporations such as telecoms, and government clients. F5, which also makes firewalls and security software, competes with Citrix Systems (CTXS), among others.
The market’s displeasure worsened on F5’s comment that the quarter was hurt by a “marked decrease in the number of deals greater than $1 million.” Not a good thing, but should the stock react so violently to a single quarter’s shortcomings?
Probably not. We made this point in March 2013, when F5 stock had fallen to $94 from $140 for similar short-term problems. After sliding further to $75, it rose 44% to $135 by late last year, 18 months later.
In a relatively slow-growth world, this company doesn’t need fast global growth to prosper, says Charlton Reynders, CEO of Reynders McVeigh Capital Management, which has been buying F5 shares for clients lately. Global data-center traffic is projected to nearly triple between 2013 and 2018, and F5 is going to benefit from that, he says.
The ADC box is a strategic point of control in the data center. It examines incoming data and decides if there are security threats; decrypts and encrypts data; and compresses data bandwidth, among other mission-critical tasks. F5 has more than 50% of the market, and ADCs cost anywhere from $50,000 to $300,000.
There is some concern about telecom customers slowing their buying, but that’s a short-term issue, Reynders says. Longer-term, other investors are worried about the software-only virtualization of ADC boxes, but here too F5 is a leader, with about a 20% market share, he notes.
Investor expectations for F5 were high because of the company’s track record of strong growth in an otherwise slow environment, that attracted momentum money, he says. “Investors always get out over their skis on F5,” he adds. “When you get a less-than-terrific quarter, the result is disappointment,” and the stock drops disproportionately.
But that could also be an opportunity. The valuation is much more attractive now, as the stock trades for 17.5 times the current-year consensus estimate of $6.35 a share, compared with an historical median P/E of 24.
Reynders expects 15% to 18% annual earnings growth in the next three years, on 12% to 15% sales growth. A return to the median P/E suggests a price nearer $150, even if estimates ease a bit. F5 has a pristine balance sheet, with no long-term debt and about $15 per share in cash and marketable securities.
Perhaps the biggest caveat is the occasional share-price volatility. With any tech firm, new competition is always a threat, but F5’s leading position and balance sheet give it the wherewithal to combat them. There could be more swings in this stock, but looking 18 to 24 months out, it looks cheap. |
