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Is F5 Networks' Stock Expensive by the Numbers?

Anand Chokkavelu, CFA
January 5, 2012

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap F5 Networks (Nasdaq: FFIV  ) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

F5 has a P/E ratio of 34.9 and an EV/FCF ratio of 20.4 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, F5 has a P/E ratio of 66.3 and a five-year EV/FCF ratio of 32.9.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

F5 is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 


1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

F5 Networks 34.9 20.4 66.3 32.9
Cisco Systems (Nasdaq: CSCO  ) 15.8 7.3 13.9 7.5
Citrix Systems (Nasdaq: CTXS  ) 33.8 18.6 49.7 26.1
Juniper Networks (NYSE: JNPR  ) 21.3 9.7 27.6 12.8

Source: S&P Capital IQ.

Numerically, we've seen how F5's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, F5's net income margin has ranged from 11.4% to 21%. In that same time frame, unlevered free cash flow margin has ranged from 25.5% to 34.1%.

How do those figures compare with those of the company's peers? See for yourself:

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, F5 has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will <