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Is Juniper Networks Stock Ripe for a Turnaround? 1 Analyst Says Yes

By Rich Smith – Jul 10, 2017 at 11:18AM

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Analysts have been predicting a turnaround for a long time. Will they be right this time?

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Up 24% over the past year, but trading almost flat in 2017 (despite predictions to the contrary), shares of Juniper Networks (JNPR 0.31%) haven't done much for investors lately. But there's good news today: Investment banker BMO Capital thinks that Juniper stock is "ripe for a turnaround."

That's why, bright and early this morning, BMO announced it is upgrading Juniper Networks stock to outperform and assigning the stock a $34 price target. If BMO is right about its turnaround story, Juniper investors stand to reap nearly a 20% gain over the next 12 months. But is BMO right?

Here are three things you need to know.

Ethernet cables

Is Juniper Networks a high-tech value stock? BMO Capital thinks so. Image source: Getty Images.

1. Juniper is in bloom

Juniper runs a diversified business selling (among other things) switches, routers, controllers, and security software for computer networks. Its business is diversified among its customers as well, with Juniper reporting in its most recent 10-K filing with the SEC that "no single customer accounted for 10% or more of our net revenues" in 2014, 2015, or 2016.

In a note covered on (requires subscription) this morning, BMO explains that Juniper deserves more credit for this "customer diversification strategy," and for its strong switching business in particular, where sales grew 37.7% year over year in the most recent quarter -- much better than router sales, which were up only 3.5%, or security products, where sales declined.

2. Juniper prunes costs

Of course, even sales growth isn't always great news if costs grow in tandem, or even outrun sales growth. That's another thing BMO likes about Juniper, though -- its "strong opex management." According to data from S&P Global Market Intelligence, Juniper's total sales grew 11.2% last quarter, but operating costs were up less than half that -- only 5.4%.

The bad news is that cost of goods sold spiked sharply higher in the quarter -- up 16.5%. But even so, this left Juniper with operating profit up 18% for the quarter, and on the bottom line, the company's net profit grew 20% -- and free cash flow quadrupled to $513 million.

3. Cash blossoms

Cost containment, it seems, really is doing wonders for Juniper's cash production. In fact, over the past 12 months, Juniper has generated positive free cash flow of $1.28 billion -- twice the company's reported net income under GAAP accounting standards of $610 million. Which brings us to the third thing that has BMO Capital so enthralled with Juniper's business: Its balance sheet.

With free cash flowing so strongly, Juniper has built up a war chest of $2.98 billion in cash, against debt of only $2.13 billion -- an $850 million net cash position. Subtracted from the company's $10.87 billion market capitalization, this leaves Juniper stock selling for an enterprise value of barely $10 billion.

The most important thing: Valuation

Is that a fair price to pay for Juniper stock? BMO thinks so, and I agree. Divided into Juniper's $10 billion enterprise value, the company's $1.28 billion in annual cash production works out to an enterprise-value-to-free-cash-flow ratio of just 7.8. That seems very cheap to me, given that analysts cited by S&P Global predict Juniper will grow its profits at roughly 11% annually over the next five years.

Throw in a modest 1.4% dividend for good measure, and I think Juniper stock is selling for only about two-thirds its fair value today. BMO thinks the stock is good for about a 20% gain over the next 12 months.

I wouldn't be a bit surprised if Juniper Networks stock goes up even more than that.

Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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