Why F5 Networks Is Being Underestimated

More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: F5 Networks (Nasdaq: FFIV  ) . Is the executive team of this Internet backbone equipment supplier doing all it can to earn you outsized returns?

Foolish facts

Metric

F5 Networks

CAPS stars (out of 5) ***
Total ratings 700
Percent bulls 91.3%
Percent bears 8.7%
Bullish pitches 63 out of 74
Highest-rated peers Digi International, Spirent Communications, Network Engines

Data current as of Jan. 27.

F5 Networks has a number of products that investors tend to lump into the broad category of cloud-computing gear. But that's not quite right. F5 originally made its fortune selling load balancers, devices that "balance" the traffic coming into and going out of a network. Like good oil for an engine, load balancers keep networks running smoothly.

The company has since broadened its portfolio to include security and hardware for helping speed the delivery of corporate applications inside a network. Given the additions, investors can be forgiven for lumping F5 in with cloud-computing poster children Akamai Technologies (Nasdaq: AKAM  ) and salesforce.com (NYSE: CRM  ) , both of which sold off in sympathy when F5 recently reported Q4 results that failed to meet analyst expectations. Fools took it as an opportunity.

"I'm voting the technology here, numbers be damned. F5 makes an excellent product and is the clear market leader for load balancing technology. These are everywhere, and our reliance on this technology is growing," wrote All-Star investor nedliug after the earnings miss.

Management overview

Executive

Years

Cash Compensation

Shares Owned

John McAdam, CEO and President 11 $1,044,260 329,044
Andy Reinland, Chief Finance Officer 6 Not given 892
Mark Anderson, Sr. VP of Worldwide Sales 7 $523,679 558
Jeffrey Christianson, Sr. VP and General Counsel 5 $447,767 6,219
Edward Eams, Sr. VP of Business Operations 11 Not given 2,937

Source: Capital IQ, a division of Standard & Poor's.
Data current as of Jan. 27.

I'm leery of ignoring numbers in the way CAPS member nedliug is. And there's no need to shy away from the numbers when it comes to F5's management team. Two key executives have more than a decade with the company, and the wages are not unfair for this type of executive team. My only regret is that that they don't own more of the business. F5's insiders account for just 0.53% of the shares outstanding.

Management analysis versus competitors

Company

Insider Ownership

Gross Margin

ROC*

ROE**

F5 Networks 0.53% 81.1% 17.3% 18.5%
Cisco Systems (Nasdaq: CSCO  ) 0.09% 63.5% 10.7% 18.7%
Blue Coat Systems 2.54% 77.3% 10.2% 13.9%
Brocade 0.44% 58.9% 4.5% 6.2%
Nortel Networks 0.09% 31.8% 0.7% NM***
Riverbed Technology 8.14% 75.9% 8.4% 7.7%

Source: Capital IQ, a division of Standard & Poor's.
Data current as of Jan. 27.
* Return on capital.
** Return on equity.
*** Not measurable.

This table makes the sell-off look even sillier. F5 leads all its peers in margin and returns on capital, and is within two-tenths of a point of leader Cisco in return on equity. Management is executing at a high enough level that I believe the stock is a buy at current levels. To reflect this, I've rated F5 to outperform in my CAPS portfolio.

Do you agree? Disagree? Let us know what you think about F5 Networks using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

What will be this year's top stock? We've got a good idea. The Motley Fool has created a brand new free report called The Motley Fool's Top Stock for 2011. In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free.

Interested in more info on the stocks mentioned in this story? Add Blue Coat Systems, Brocade Communications, Cisco, F5 Networks, Nortel Networks or Riverbed Technology to your watchlist.

Akamai and salesforce.com are Motley Fool Rule Breakers recommendations. Motley Fool Alpha owns shares of Cisco Systems.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has created a bull call spread position in Cisco. The Fool is also on Twitter as @TheMotleyFool and its disclosure policy is managing just fine, thanks.


Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2011, at 9:12 PM, will19699 wrote:

    I concur with this article 100% and I added my FFIV today on mid day dip. I serious think this will be back to $140 within a month or so. Way oversold for no reason. I could see this sell off to $130 range but this way way overdone. Probably manipulated for traders to reload.

  • Report this Comment On January 29, 2011, at 12:31 AM, Alaejos wrote:

    Tim, you have missed Dan Matte, Sr. VP Marketing & Bus. Development from list. Dan has been with the company since it started.

    I would also add Karl Tribes, Sr. VP of Product Development and CTO.

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