Juniper Jumps on the Internet of Things

03/16/2015 7:00 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

This year, an estimated 25 billion Internet-enabled things will be connected to the Internet and to each other and in the next five years, that number will double again, suggests Briton Ryle, editor of The Wealth Advisory.

Juniper Networks (JNPR) sells routing and switching gear to corporations. In addition to the routers and switches that direct traffic on the Internet, the company also provides software, tech support, and training.

Juniper is often considered a smaller version of Cisco Systems (CSCO). But that comparison is not exactly accurate. For one, Juniper has a less-diversified product line. Roughly 50% of sales come from routers, a segment that makes up just 17% of Cisco sales.

Anecdotal evidence suggests Juniper is doing better than Cisco in the Internet of Things (IoT) space. Juniper is more aligned with the open-source movement, allowing its switching software to run on any router.

It may come as a surprise to learn that routing revenue has been weakening. In its latest quarter, Cisco reported routing revenues lower by ~8%, while they were ~13% lower in Juniper’s latest quarter.

You may also be surprised to learn that Juniper shares are up around 10% since it reported that revenue decline. The shares rallied for two reasons: One, the decline wasn’t as bad as expected.

And two, cost-cutting measures—introduced by activist investor Elliot Management—are working. The company reported $0.41 in per-share earnings when analysts were looking for $0.31.

Revenue came in a bit ahead of estimates. And even though gross margins fell year over year, operating margins actually ticked up slightly. That is a clear sign Juniper is operating with more efficiency.

Meanwhile, Juniper’s biggest customer is Verizon (VZ), which recently announced it was increasing its 2015 CAPEX budget. The fact that Juniper gets 65% of its revenue from carriers may turn out to be a very good thing.

Juniper has $2 billion in cash and long-term debt of $1.35 billion. It is also buying back shares. It bought back nearly $2 billion in shares last year and is expected to retire another $1.4 billion this year. That’s substantial for a $10 billion company.

We view Juniper Networks as a solid play on increased CAPEX spending and mobile carrier network upgrades. We consider Juniper Networks a strong buy under $24. Our 12-month price target is $31.

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