by Susan J. Aluise | August 17, 2012 6:45 am
Network equipment stocks have spent so much time on the schneid lately that many investors have left the sector for dead. But this week’s better-than-expected earnings at networking giant Cisco Systems (NASDAQ:CSCO), optical gear provider JDS Uniphase (NASDAQ:JDSU) and cloud storage vendor NetApp (NASDAQ:NTAP) are early signs that the industry may be building back from the brink.
All three of these stocks got a nice earnings bounce this week — and each of these market movers brings value to the table for investors.
Here’s a breakdown of why these three stocks could be a good way to cash in on today’s tech sector bounce:
Cisco rocked the market when its fiscal fourth-quarter results beat the Street on both the top and bottom lines Wednesday night. CSCO shares were up by more than 8% by midday Thursday, and closed at $19, some 9.5% higher. The tech bellwether’s rising tide lifted most ships in the sector.
By the numbers, CSCO’s beat was a small one: Operating profit rose 15% to $2.5 billion (47 cents a share) on revenue of $11.7 billion — analysts had expected 46 cents on $11.6 billion. But Cisco, which only began paying a dividend last year, wowed the market by hiking its payout 75%.
While a penny here or there makes little difference, there was a lot to like in the details. CSCO’s crusade to cut costs is working. The 7,800 jobs it cut during the past 12 months shaved nearly 4% off its operating expenses. Chairman and CEO John Chambers has taken the battle for market share back to competitors like Hewlett-Packard (NYSE:HPQ), Alcatel Lucent (NYSE:ALU) and Juniper Networks (NASDAQ:JNPR) by slashing prices on its top-shelf networking gear. The company has bailed out of distracting consumer businesses, emerging leaner, meaner and ready for battle.
That will make it easier for Cisco to ride out the headwinds in Europe. With strong sales in Asia and resurgent corporate spending in the U.S., Cisco is in a good position to cash in on the growth in videoconferencing and other data center priorities.
Chambers’ extreme makeover has boosted CSCO’s value proposition considerably. With a market cap of $101 billion, at its current level the stock is still 11% lower than its 52-week high in April. CSCO has a price-to earnings growth (PEG) ratio of 1.1, indicating it could be a hair overvalued. But it has a forward P/E of less than 11, and Cisco looks even better with the dividend hike, which brings the current yield to 3.1%. I rank CSCO a buy with a price target of $23.
The market’s exuberance over Cisco’s solid earnings came on the heels of a positive quarterly report from optical component manufacturer JDS Uniphase. JDSU shares rose more than 8% Wednesday after fourth-quarter revenue and profit were stronger than analysts expected — despite a difficult economy and tough competition from optical networking firms like Finisar (NASDAQ:FNSR) and Oclaro (NASDAQ:OCLR).
The fiber-optic components sector has been bludgeoned over the past couple of years as its major customers — telecommunications providers — have put off new infrastructure spending in the weak economy. Although JDSU’s earnings did swing to a loss in the quarter, it reported adjusted earnings of 10 cents a share on net revenue of $439.3 million in the quarter, beating analysts’ estimates by a penny.
On the face of it, JDS Uniphase’s earnings — combined with lower sales and narrowing margins — are nothing for the market to get excited about. But there’s more to this story than meets the eye: JDSU managed to hold its own in the midst of ugly economic headwinds. And when telecom carriers stop spending — as they basically have done for the past year — the impact is disastrous.
But carriers like AT&T (NYSE:T), Verizon (NYSE:VZ) and Sprint (NYSE:S) are scrambling to support a plethora of new devices with upgraded 4G/LTE networks. U.S. carriers alone plan to spend $10.5 billion next year on mobile capital expenditures — a dynamic JDSU is well positioned to profit from.
With a market cap of $2.7 billion, JDSU is trading around $11.85, 40% above its 52-week low last month. The stock has a PEG ratio of 1.2, indicating it’s overvalued, and a forward P/E of less than 12. Like most tech stocks, there’s no dividend — and profit margins bear watching.
Still, JDS Uniphase has total cash of $721 million, compared to total debt of $293 million. I rank JDSU a buy, but wait until some of the exuberance dies down a bit. My price target is $13.50.
The storage systems and software provider’s shares got a shot in the arm when it reported stronger-than-expected earnings on Wednesday. After one-time charges, NetApp earned $156 million (42 cents a share) in its fiscal first quarter on revenue of $1.45 billion. Analysts had expected 38 cents a share on $1.46 billion in sales. Shares were up nearly 5% midday Thursday on heavier than-usual-volume. The shares closed up 3.8% at $32.95.
NetApp is one of the more intriguing cloud computing plays because its systems and software can store, manage, protect and retain massive amounts of their customers’ data securely and off-site. Cloud storage is an important revenue opportunity as more enterprises, government agencies and other users reduce the number of physical servers they own and manage. NetApp’s offerings enable these customers to gain more storage space and better performance — at a lower total cost.
The company’s partnership with Cisco has been valuable as well — particularly the FlexPod data-center storage product. NetApp now has more than 1,300 customers for FlexPod, which is built on storage infrastructure shared with Cisco. NetApp also partners with companies like IBM (NYSE:IBM), VMware (NASDAQ:VMW) and Symantec (NASDAQ:SYMC) to deliver storage products as part of their integrated cloud offerings.
With a market cap of $12.1 billion, at its current level NetApp is trading 19% above its 52-week low in May. The stock has a PEG ratio of 1.3, indicating that it could be overvalued, and its forward P/E is over 13.
Still, I think the market opportunity in the burgeoning cloud storage space — combined with NetApp’s partnerships with major cloud vendors — is worth the price. It also has total cash of $5.4 billion and total debt of only $1.3 billion. I rank NTAP a buy with a price target of $37.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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