Stolen from the FOOL
I'm here to look at another Goldman Sachs Recommended List Stock. Recall a few weeks ago I looked at how JDS Uniphase was covered by GS (http://fireboards.fool.com/Message.asp?mid=16791052).
Well I'd like to bring before the Fool Tribunal charges of crimes against reality by Goldman Sachs. The evidence is in the form of outtakes from GS research reports on Juniper Networks.
Disclaimer: Before I get started, I realize that the markets don't trade in a vacuum (economic slowdown and acts of horrific terrorism affect the world economy). I also realize that the visibility of the sector could change for the positive as quick as it did for the negative.
But I think it's very interesting how GS has kept such a positive outlook on this company throughout the last year even though they recognized the problems that the whole sector was having. They even talk about how the stock is overvalued. But don't worry!
I also think it's interesting on how they use the same non-words that don't really mean anything: visibility, the current environment, and my favorite, the best name to own.
I'm not assigning blame to anyone. I think many of us (myself included) got blindsided by the major downturn in tech-stock prices. I mostly want to put this out there as evidence next time we see a stock that is priced for perfection. When some poor soul comes along and tells us that the stock is overpriced, maybe we should listen to his reasons.
Again, GS had Juniper on its RL before 1 year ago when the stock price was even higher. I would love to have access to older recommendations if anyone has them.
By the way, as if by rhetoric, I included the actual disclaimer that reveals their conflict of interest. It was included in every report in very small type.
I also want to say that I have not sold my JDSU shares like I was thinking about earlier. And I don't now nor have I ever had a position in Juniper Networks.
For your information:
RL = Recommended List. Expected to provide price gains of at least 10 percentage points greater than the market over the next 6-18 months.
Chris McAdams
Enjoy:
From the April 12, 2001 (Recommended List -- Latest Price $42.76) Goldman Sachs JNPR Research Report:
Long Term EPS Growth is expected to be 50% a year.
Juniper reported a solid first quarter which was in-line with our estimates…Considering the difficult environment for telecom vendors and the multiple pre-announcements that have come from the industry, investors will view this as welcome news. Management's tone was confident and their long-term outlook remains positive. In accordance with the environment and the company's conservative nature, guidance was lowered to reflect the lack of visibility in the market…
REVISING ESTIMATES. Although Juniper's revenue and earnings were in-line with first quarter projections, the company revised guidance downward somewhat to reflect the lack of visibility in the current environment. Historically, the company has been conservative with respect to guidance, and we believe that Juniper is confident in its ability to meet these revised expectations…
KEY METRICS: Most key metrics were positive. Gross margin was up to 65.8%, ahead of our 65% estimate and Q4 gross margin of 65.7%. … The company added 235 employees to bring the total head count to 1,162, DSOs decreased one day to 53 days, and cash flow from operations was positive. One notable negative was the fact that book to bill was below one for the first time since Juniper became a public company.
GROSS MARGIN REMAINS HIGH: Despite the more difficult environment for comm tech vendors have been consistent and pricing pressure has not been a factor as carriers continue to place more importance of deploying leading technology.
STRONG BALANCE SHEET: Juniper was cash flow positive from operations during the March quarter, but cash declined to $1.5 bln from $1.6 bln as the result of a $185 mln land purchase. DSOs declined 1 day to 53 days, and remain below the target range of 55-65 days. In our opinion, investors should not be too concerned by lower levels of deferred revenue, which declined to $25.5 mln from $34.6 mln, as carriers are accepting Juniper products in shorter cycles.
In 8-point font on the next page:
The Goldman Sachs Group, Inc. IMPORTANT DISCLOSURES
Goldman, Sachs & Co. or an affiliate has rendered significant corporate finance services to Juniper Networks, Inc. or affiliates thereof within the past 12 months. Goldman, Sachs & Co. and/or an affiliate makes an over-the-counter market in Common Stock of Juniper Networks, Inc.. Goldman, Sachs & Co. or an affiliate has managed or comanaged a public offering of Juniper Networks, Inc.'s securities in the past several years.
From the June 8, 2001 (Recommended List -- Latest Price $46.63) Goldman Sachs JNPR Research Report:
Visibility remains very low, as management did not give guidance for the second half of the year, stated that Q2 DSO levels will probably be higher than normal, and did not speculate on the timing of a recovery for the high end routing market. … While recovery is likely to take several quarters, we believe near-term bad news is priced into the stock and Juniper is well positioned to emerge as the leader in high end routing.
NOBODY IS IMMUNE…
Long Term EPS Growth is expected to be 50% a year.
TECHNOLOGY LEADERSHIP WILL PREVAIL OVER PRICING IN THE LONG RUN. While Juniper expects customers to push to improve their terms, the company does not expect pricing pressure to become significant, and cited that the majority of their projected decline in gross margin is due to lower than expected sales … we believe leading technology and not pricing will prevail in the high end routing market.
TIMING FOR A REBOUND IS UNCLEAR. Juniper was unable to provide guidance beyond the current quarter, underscoring the very low visibility in the market. The timing of rebound is hard to predict. First, there little visibility in the broad telecom market … The company witnessed softening in Europe, mixed growth in North America, and solid growth in Asia, especially China. Thus, while recovery is likely to take several quarters, we believe near-term bad news is priced into the stock and Juniper is well positioned to emerge as the leader in high end routing.
In 8-point font on the next page:
The Goldman Sachs Group, Inc. IMPORTANT DISCLOSURES
Goldman, Sachs & Co. or an affiliate has rendered significant corporate finance services to Juniper Networks, Inc. or affiliates thereof within the past 12 months. Goldman, Sachs & Co. and/or an affiliate makes an over-the-counter market in Common Stock of Juniper Networks, Inc.. Goldman, Sachs & Co. or an affiliate has managed or comanaged a public offering of Juniper Networks, Inc.'s securities in the past several years.
From the July 13, 2001 (Recommended List -- Latest Price $28.47) Goldman Sachs JNPR Research Report:
TURNING THE CORNER? Q2 sales … in line with JNPR's revised guidance. … investors will view this guidance as a sign that JNPRs' business is stabilizing. This should come as a relief as investors… While visibility continues to be very low and fundamentals for the industry haven't really improved, JNPR's guidance implies that its numbers could be bottoming and JNPR could get back on the growth track as it benefits from reallocation of spending towards IP infrastructure.
Long Term EPS Growth is not available.
STABILIZING SEQUENTIAL TREND IS POSITIVE. While visibility continues to be low, Juniper's guidance of a flat September quarter and marginally up December quarter should be encouraging to investors for a couple of reasons…
KEY METRICS. Most key metrics were in-line with Juniper's revised guidance. The company was cash flow positive (over $100 mln) and had a book to bill above one. Gross margin was 60.2%, compared to guidance of 60%. The company is guiding to 60% gross margin for the remainder of the year. …DSOs were up, as the company expected, to 62 days, but remain within the 55-65 day range. Headcount was reduced by 7% to 1,080 people. …
The primary reason for the downward trend in margin is the 39% sequential decline in sales… … The company stated that it witnessed stronger demand for high-speed interfaces. …
SOME CUSTOMER DRIVEN PRICING PRESSURE. … The company did state that it has seen its carrier customers hold out for more favorable pricing terms given the lack of urgency to buy products in the current environment.
BALANCE SHEET CONTINUES TO BE STRONG… Cash and investments were approximately $1.6 billion, up about $115 million primarily as a result of positive cash flow from operations. Deferred revenue was up $4.3 million to $29.8 million and is expected to increase going further because of larger service revenues.
In 8-point font on the next page:
The Goldman Sachs Group, Inc. IMPORTANT DISCLOSURES
Goldman, Sachs & Co. or an affiliate has rendered significant corporate finance services to Juniper Networks, Inc. or affiliates thereof within the past 12 months. Goldman, Sachs & Co. and/or an affiliate makes an over-the-counter market in Common Stock of Juniper Networks, Inc.. Goldman, Sachs & Co. or an affiliate has managed or comanaged a public offering of Juniper Networks, Inc.'s securities in the past several years.
From the October 12, 2001 (Recommended List -- Latest Price $16.64) Goldman Sachs JNPR Research Report:
Long Term EPS Growth is expected to be 25% a year.
Juniper reported Q3 sales of $201 mln and EPS of $0.10 well above consensus and our estimates. While visibility is limited, JNPR provided solid guidance - 02 sales of $900 mln-$1.0 bln and EPS of $0.40-$0.45. … JNPR is a leader in this market. Based on these factors we continue to recommend JNPR to longer-term investors while recognizing that the stock's 100%+ gain over the last week could create lower entry points for short-term investors.
STRONG KEY METRICS ACROSS THE BOARD: Gross margin for Q3 was 60.4%… GM for next quarter is expected to be 61% as a result of lowered carrying costs of materials. … Headcount was up 5 to 1,085 employees, and the company said that it will continue to add high quality people on a selective basis.
ADJUSTING ESTIMATES. We are raising our 2001 estimates to reflect Q3 upside, and the higher margin guidance for Q4. Our new '01 estimates are $936 mln and $0.53, compared to previous estimates of $909 mln and $0.48. We have adjusted our 2002 estimates to sales of $950 mln and EPS of $0.45 vs. previous estimates of $915 mln and $0.48 to reflect the company's guidance. We believe that the company has solid near-term visibility …
VALUATION. At $21.70 (where the stock closed in after-hours trading), the stock is trading at 48x our '02 EPS estimate - we believe there is upside to our '02 EPS estimate if the company achieves its revenue guidance. The stock has more than doubled from a low of $8.90 in the past two weeks, which could lead to near-term volatility. …. Prior to the telecom bubble, Cisco traded at 8-10x revenue. If you apply that multiple to the $1 bln sales number for Juniper, you arrive at a price target in the $25-30 range, implying significant upside, even from after-market levels. We continue to believe that Juniper is one of the best positioned names …
STRONG BALANCE SHEET. Cash and investments rose to $1.7 bln, up about $60 mln from the previous quarter, benefiting from the over $100 mln in operating cash flow for the quarter. Deferred revenue went up by $2 mln to $32.1 mln at the end of the quarter. The company expects this to increase with larger service revenues going forward.
In 8-point font on the next page:
The Goldman Sachs Group, Inc. IMPORTANT DISCLOSURES
Goldman, Sachs & Co. or an affiliate has rendered significant corporate finance services to Juniper Networks, Inc. or affiliates thereof within the past 12 months. Goldman, Sachs & Co. and/or an affiliate makes an over-the-counter market in Common Stock of Juniper Networks, Inc.. Goldman, Sachs & Co. or an affiliate has managed or comanaged a public offering of Juniper Networks, Inc.'s securities in the past several years.
From the November 13, 2001 (Recommended List -- Latest Price $23.99) Goldman Sachs JNPR Research Report:
Long Term EPS Growth is expected to be 25% a year.
Juniper announced today that it intends to acquire Pacific Broadband Communications (PBC), …for $200 mln in stock. We believe this acquisition is an important strategic positive for JNPR, but believe it is unlikely to have a significant stock impact due to its small size and minimal EPS impact (dilutive to EPS by under a penny per quarter in '02 and accretive in '03). …
The company did cite the Gartner Group's estimate that the CMTS market could grow from $500 mln in 2001 to over $1.2 bln in 2005.
In 8-point font on the next page:
The Goldman Sachs Group, Inc. IMPORTANT DISCLOSURES
Goldman, Sachs & Co. or an affiliate has rendered significant corporate finance services to Juniper Networks, Inc. or affiliates thereof within the past 12 months. Goldman, Sachs & Co. and/or an affiliate makes an over-the-counter market in Common Stock of Juniper Networks, Inc.. Goldman, Sachs & Co. or an affiliate has managed or comanaged a public offering of Juniper Networks, Inc.'s securities in the past several years.
From the December 12, 2001 (Recommended List -- Latest Price $22.93) Goldman Sachs JNPR Research Report:
Long Term EPS Growth is expected to be 25% a year.
Juniper revised 4Q guidance this morning to sales of $150-155M and EPS of $0.05, vs. our ests of $200M and $0.10,…[despite this] we believe JNPR is very well positioned within this market, has shown that it can effectively manage cash and expenses during a slowdown, and will likely benefit from a strong product cycle in 2002. We are lowering 2002 estimates to sales/EPS of $745M/$0.23 compared to previous estimates of $950 mln and EPS of $0.45.
KEY METRICS. … Management is confident it will achieve its gross margin target of 61%, compared to 60.4% last quarter, and expects to be cash flow positive by $20-$30 mln for the quarter. The company said it anticipates achieving these targets without any further headcount reductions or restructuring. DSOs will likely fall in the middle of the target 55-65 day range.
EFFECTIVELY MANAGING THE DOWN CYCLE. One positive take away from Juniper's revision is its proven ability to effectively manage both cash and expenses during a difficult macro environment. …We believe that the company will benefit from this with a strong product cycle in 2002.
VALUATION. Investors will likely use various techniques to determine proper value for Juniper stock. One metric is Juniper's price to sales multiple, which has typically been in-line with Cisco's multiple of 7-8x CY02 sales. Based on our Juniper 2002 sales estimate of $745 mln, a 7-8x P/S multiple translates to a $15-18 price range. Relative to Cisco, some investors may discount Juniper's multiple due to its exclusive focus on the carrier market, which is will likely be more volatile in the intermediate- term than the enterprise market. However, others may choose to reward Juniper with a premium to Cisco based on its strong margin profile, its ability to weather the down cycle, anticipation of a strong product cycle, and its focus on core routing. We continue to believe that Juniper is one of the best names to own within comm tech for long-term investors.
In 8-point font on the next page:
The Goldman Sachs Group, Inc. IMPORTANT DISCLOSURES
Goldman, Sachs & Co. or an affiliate has rendered significant corporate finance services to Juniper Networks, Inc. or affiliates thereof within the past 12 months. Goldman, Sachs & Co. and/or an affiliate makes an over-the-counter market in Common Stock of Juniper Networks, Inc.. Goldman, Sachs & Co. or an affiliate has managed or comanaged a public offering of Juniper Networks, Inc.'s securities in the past several years.
From the January 16, 2002 (Recommended List -- Latest Price $17.96) Goldman Sachs JNPR Research Report:
Long Term EPS Growth is expected to be 25% a year.
As we had anticipated in our preview note, JNPR announced in line 4Q results, and guided to a flat March quarter and a slight uptick in June, which was slightly more positive than some investor expectations. While Juniper's valuation does not look cheap based on our new estimates, we believe that JNPR will be a winner over the next 12 months…
KEY METRICS: Juniper reported 4Q01 results in line with pre-announced guidance and our estimates. Revenues of $151.0 mln were down from $201.7 mln in 3Q and pro forma EPS of $0.05 was down sequentially from $0.10. For the full FY2001, revenues were $887 mln and EPS was $0.50, as compared to FY2000 revenues of $673.5 mln and EPS of $0.53. Gross Margin for 4Q was 61.1%, up from 60.4% in 3Q. GM going forward is expected to stay around the 61% level. 4Q book to bill was above one and cash flow from operations was $28 mln. … Headcount was up at 1,227 from 1,085 last quarter, primarily due to the 134 employees acquired from Pacific Broadband.
LOWERING ESTIMATES TO REFLECT MORE MODERATE SALES REBOUND AND PBC ACQUISITION RELATED DILUTION. We are lowering our estimates to reflect a more moderate rebound in sales. … Our 2003 estimates do not really assume any significant ramp in IP spending or any contribution from the Pacific Broadband division (Juniper Cable), which is expected to be accretive in 2003. A more optimistic estimate of growth in the IP routing market and assumption of sales contribution from Juniper's cable division gives us an optimistic CY'03 EPS estimate in the mid $0.40 range.
VALUATION. At slightly under $18, Juniper stock trades at over 35x our mid $0.40 optimistic case CY'03 EPS estimate. While we would admit that Juniper's current valuation does not look inexpensive, we believe that investors will pay a premium for Juniper stock over the next 12 months based on several factors. … Thus, we believe the stock remains attractive to long-term investors despite the current valuation levels.
…
STRONG BALANCE SHEET: DSOs went up 12 days to 62 days in 4Q (back into the company's target range of 55-65 days). Cash and investments stayed about the same at $1.7 bln, as cash flow from operations was $28 mln, down from $100 mln last quarter. Deferred revenue went up to $38.6 mln from $32.1 mln last quarter. The $6.5 mln increase as opposed to the $2 mln last quarter was largely a result of the increasing trend in service revenues as a percentage of the total sales mix.
In 8-point font on the next page:
The Goldman Sachs Group, Inc. IMPORTANT DISCLOSURES
Goldman, Sachs & Co. or an affiliate has rendered significant corporate finance services to Juniper Networks, Inc. or affiliates thereof within the past 12 months. Goldman, Sachs & Co. and/or an affiliate makes an over-the-counter market in Common Stock of Juniper Networks, Inc.. Goldman, Sachs & Co. or an affiliate has managed or comanaged a public offering of Juniper Networks, Inc.'s securities in the past several years.
From the March 19, 2002 (Recommended List -- Latest Price $11.42) Goldman Sachs JNPR Research Report:
Long Term EPS Growth is expected to be 25% a year.
We are lowering our estimates on Juniper to reflect the challenging environment faced by carrier backbone focused equipment vendors. … guidance revisions by peers indicate that carriers continue to be in a stringent capital conservation mode, and we believe that Juniper will likely be impacted by this trend. While JNPR stock will likely remain volatile in the near-term, it remains one of our favorite ideas for investors with a 12-mo horizon due to its leadership position in IP routing, a market that we believe will lead a recovery in spending.
REDUCING ESTIMATES. We are reducing our Q102 estimates to sales of $125 mln and EPS of $0.00 vs. our previous estimates of $150 mln and EPS of $0.03. We are also lowering our 2002 and 2003 sales/EPS estimates to $595 mln/$0.10 and $800 mln/$0.34 compared to previous ests of $675 mln/$0.18 and $860 mln/$0.36. … based on broad lack of visibility … we believe the company will reduce headcount if sales come in at our expected levels. …
REMAINS ATTRACTIVE FOR 12-MO INVESTORS. At $11.30, Juniper trades at 32x our new CY'03 EPS estimate and a levered revenue multiple of 3.8x our new CY'03 revenue number. Our near-term cautious view on the comm. equipment sector remains unchanged … However, we would continue to recommend Juniper to risk tolerant investors with a 12 month perspective based on the company's leadership position in the routing market, which we believe will lead a recovery in telco spending and is one of the most important long-term opportunities in telco infrastructure, and other catalysts mentioned in the following paragraph. We look at valuation on two fronts <blah, blah, blah> which would imply a $17 price target.
REASONS FOR OUR LONG-TERM POSITIVE STANCE. Over the next 12 months we continue to believe that Juniper
will emerge from this downcycle as a leader in the commtech market for 4 key reasons.
… Juniper remains cash flow positive and has yet to report a pro forma EPS loss despite significant reductions in revenue levels.
In 8-point font on the next page:
The Goldman Sachs Group, Inc. IMPORTANT DISCLOSURES
Goldman, Sachs & Co. or an affiliate has rendered significant corporate finance services to Juniper Networks, Inc. or affiliates thereof within the past 12 months. Goldman, Sachs & Co. and/or an affiliate makes an over-the-counter market in Common Stock of Juniper Networks, Inc.. Goldman, Sachs & Co. or an affiliate has managed or comanaged a public offering of Juniper Networks, Inc.'s securities in the past several years. |
