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 Juniper Networks
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.
Juniper Networks has a P/E ratio of 42.3 and an EV/FCF ratio of 32.5 over the trailing 12 months. If we stretch and compare current valuations with the five-year averages for earnings and free cash flow, Juniper Networks has a P/E ratio of 183.2 and a five-year EV/FCF ratio of 27.3.
A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.
Juniper Networks, which makes products for IP networks, is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates.
Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.
Numerically, we've seen how Juniper Networks' valuation rates on both an absolute and a 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, Juniper Networks' net income margin has ranged from minus 42.4% to 14.5%. In that same time, unlevered free cash flow margin has ranged from 13.6% to 26.8%.
How do those figures compare with those of the company's peers? See for yourself:
Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.
Also, over the past five years, Juniper Networks has tallied up four 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 overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company has done over the past five years. In that time, Juniper Networks has put up past EPS growth rates of 10.3%. Meanwhile, Wall Street's analysts expect future growth rates of 19.4%.
Here's how Juniper Networks compares with its peers for trailing five-year growth (because of losses, Ciena's past growth rate isn't meaningful):
Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.
And here's how it measures up with regard to the growth analysts expect over the next five years:
Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.
The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Juniper Networks are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 42.3 P/E ratio.
In this space, I'd rather take my chances with Cisco than Juniper Networks. But that's just me. If you find Juniper Networks' numbers compelling, don't stop. Continue your due diligence until you're confident that the initial numbers aren't lying to you.
Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis. And for more stock ideas, check out this recent article: "The 3 Biggest Fool.com Trends of 2010."
Anand Chokkavelu owns shares of Cisco Systems. 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 a disclosure policy.