F5 Reaches Its Ceiling, For Now

01/23/2012 3:48 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The story isn’t over for this fast-growing tech stock, but it’s reaching heights that make profit taking the most attractive option, writes MoneyShow’s Jim Jubak, who can also be found at Jubak’s Picks.

A great earnings report from F5 Networks (FFIV) after the close on January 18 that has taken the stock within hailing distance of my June target price of $124.

I’m going to sell F5 Networks out of my Jubak’s Picks portfolio today—not because of anything wrong with the earnings report—it was great—but on rising expectations among investors. I think F5 Networks has hit the point many momentum plays hit, where investors start hoping for more—and pricing in more—than it’s reasonable to expect the company to deliver.

I have a 56.6% gain on these shares since I added them to this portfolio on September 28, 2011.

For the first quarter of fiscal 2012, F5 Networks reported earnings of $1.03 a share. That was two cents a share better than the Wall Street consensus. Revenue climbed by almost 20% from the first quarter of fiscal 2011 to $322.4 million. That was slightly above the consensus expectation of $319.06 million.

For the second quarter of fiscal 2012, the company raised its guidance to earnings of $1.05 to $1.07 a share. The current Wall Street earnings estimate calls for $1.05 a share.

Absolutely nothing wrong with these numbers, especially in the seasonally weak first quarter —except that they mark a real decline in the momentum for this stock. For the just reported quarter, F5 beat the Wall Street earnings consensus by 2.5%. That’s down from the 9.1% positive surprise in the September 2011 quarter and the 8.5% positive surprise in the June 2011 quarter.

Wall Street analysts seem to be shaking off any worry that they might have about that pattern by saying that the first quarter of fiscal 2012 marks an inflection point in the company’s growth.

Next quarter will mark an acceleration in growth as revenue from new products such as the VIPRION 2400 and the new Virtual Clustered Multiprocessing module kicks in, many Wall Street reports say. The company cited that product pipeline in its guidance for 20% revenue growth year-to-year in 2012.

It’s the price that investors have put on that growth thesis that bothers me, and leads me to say, “Take profits now because the risk outweighs the reward.”

At the January 19 close, the shares trade at 38.7 times trailing 12-month earnings per share. That drops to a forward price-to-earnings ratio of 33.6 on projected earnings. But that’s rather pricey for a stock that the Wall Street consensus sees growing earnings by just 20.5% in fiscal 2012.

That kind of growth priced at that kind of P/E in this kind of volatile market is just a risk profile that I don’t like very much right now. I’ll take my profits now, thank you.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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