In spite of decent growth over the last year and a half, Juniper Networks (JNPR +0.00%) has been under increasing pressure from shareholders who claim its stock is underperforming. This year, there have been some big changes at Juniper, including a new CEO and a restructuring plan. How will this affect Juniper and its stock, and is now a good time to buy?
A bit of background
Juniper's core business is making high-performance routers for service providers and enterprise customers. Through product development and a series of acquisitions, it has also expanded its offerings into related fields, particularly into switches and network security.
Last year, Juniper recorded revenue of $4.67 billion, an increase of 7% over 2012. Routing and switching were both up 15%, year over year, while security was down 16%. The shrinking security numbers clearly stick out, but Juniper's management has been reassuring investors that due to good bookings, security will return to growth in 2014.
The guidance for the first quarter of 2014 is also reasonably positive, with revenue between $1.12 and $1.16 billion -- 8% year-over-year growth at the midpoint. EPS is expected to be between $0.27 and $0.30, compared to $0.24 in the first quarter of 2013. Additionally, bookings are strong across all products, according to management. So, with good past growth as well as positive demand going forward, why are shareholders unhappy?
Underperforming share price
Elliott Management, which holds 6.2% of Juniper's common stock, released a report in January detailing how Juniper has been letting its shareholders down. The central message is that Juniper has been chronically and severely underperforming in terms of share price compared to peers such as Brocade (BRCD +0.00%) and Cisco, as well as the NASDAQ and the S&P 500 indexes.
The good news, according to the report, is that there are "readily apparent and implementable levers to drive long-term shareholder value." Elliott estimates that such changes would lead to a stock price of $35-$40 per share, a 45%-65% increase over the current level.
Elliott's first recommendation is to cut $200 million in costs over the next year. This largely targets Juniper's research and development, which, at 21% of revenue, is the highest among peer companies. Second, the report suggests pruning the product portfolio -- in particular, reevaluating security and switching. Finally, Elliott would like to see more cash going back to investors through $3.5 billion in stock buybacks and a quarterly dividend of $0.125 per share.
Juniper responds
In January, Shaygan Kheradpir took over as CEO from Kevin Johnson, who served in the top role since 2008. Several weeks later, at the fourth-quarter conference call, Kheradpir announced an integrated operating plan, or IOP, which became publicly available at the end of February.
The IOP seems to follow the recommendations outlined in Elliott's January report, although with smaller numbers. Juniper has committed to cutting costs by $160 million in the next year, to buying back $2 billion worth of shares, and to initiating a $0.10 quarterly dividend. The IOP also mentions streamlining the business portfolio, as well as focusing on the "fastest-growing networking segments." Juniper has started following through with this plan -- in April, it announced that it will be reducing its workforce by 6% and shedding 12% of its leased real estate.
What kind of an impact are these changes likely to have? The restructuring numbers are smaller than Elliott had lobbied for, so the share-price target should probably also be reduced. On the other hand, Brocade, one of Juniper's main competitors, has been undergoing a similar process of cost-cutting and product pruning since Lloyd Carney took over as CEO in January 2013. Within several months, its share price started responding very positively and has risen almost 80% in the last year.
In conclusion
Juniper is a good company with good prospects. However, some shareholders have been complaining about its share-price performance. They have suggested reductions in costs, a more focused product portfolio, as well as greater cash returns for investors. Juniper has responded by releasing a plan to do just that, and it has already started implementing the plan by releasing some staff and closing facilities. If it follows through, the stock price is likely to appreciate significantly over the next year, making Juniper definitely worth a look.
