JNPR: Rising Tech Tides Not Lifting All Boats

by Dan March 14, 2012 3:38 pm • Commentary

JNPR downgraded by Brokerage firm BMO Capital today from Outperform to Market Perform, in Wall Street Speak that means Buy to Hold, and they lowered their 12 month price target from $24 to $21 (highlights below).  

We are downgrading shares of JNPR to MARKET PERFORM from OUTPERFORM. Despite upgrading the shares three months ago, we are moving to the sidelines as we believe that the issues at JNPR may run deeper than just weak telco spending. We now believe the recovery will take longer than initially expected. JNPR’s shares are up about 10% since our upgrade despite posting Q4 results that missed expectations, a shortfall to Q1 guidance, market share loss, and lower backlog. And it is not just routers, as JNPR has under-performed its network security counterparts as well. We believe that JNPR’s new products will ultimately ramp and help JNPR recapture some lost share, but view the timeline as uncertain and the risk/reward as balanced.

Neutral/negative. We believe results for JNPR will remain mixed as the uptake of new products remains uncertain. While the backdrop for spending remains weak, we still expect a recovery as we move through the year. We believe consensus already reflects a meaningful sales ramp through 2012.

Our price target of $21, down from $24, is based on a P/E multiple of 20x our 2013 pro forma EPS estimate of $1.05.


MY TAKE: JNPR is practically unchanged ytd, a year that the Nasdaq is up 16.5% and larger Peer CSCO is up 11.5% ytd.  The street is fairly mixed on the name with 11 Buys, 26 Holds and 3 Sells with an avg 12 month price target about $22.50.  Short interest is fairly low at only about 2.5% of the float.

One big problem with the stock is that at current levels it trades at about 21.5x this year’s expected earnings of about .95 which would be down 20% year over year. What’s worse is that there is no sales growth. It would be one thing if the company was finding opportunities to grow sales, even at the expense of profits with increased investments in businesses or ventures that would provide future leverage, but it appears with sales expected to be flat yoy that they are losing market share, or demand is weak for legacy products.

The company is expected to report Q1 earnings on April 24th, which will fall into May expiration, and May isn’t listed yet, but will be next week.

Technically, the chart looks horrible on an outright basis or even on a relative basis to its tech peers, or for that matter any other stock in the market.  While many large cap techs are making new all time or multi-year highs, this one flirts with this years lows…..

[caption id="attachment_9558" align="aligncenter" width="300" caption="1 yr JNPR chart from Bloomberg"][/caption]


Trade to Consider: I am not sure you want to press the stock here down 4% on this downgrade, but I would definitely look to lay out a short on a bounce.  I do not have this trade on, but want to consider different structures as we head into the end of Q1 for stocks that I think have some ability to surprise consensus thinking.

As it relates to this pig, you could wait until May options are listed next week, or play April for the potential for a negative pre-announcement with a low premium defined risk structure.

TRADE: JNPR ($20.47) Buy April 20/18/16 Put Fly for about .35

-Buy 1 April 20 Put for .83

-Sell 2 April 18 Puts for a total of .56 (.28 each)

-Buy 1 April 16 Put for .08

Break-Even On April Expiration:

Profits btwn 19.65 and 18 make up to 1.65, max gain at 18 of 1.65, payoff trails off btwn 18 and 16.35.

Losses of up to .35 btwn 19.65 and 20, and btwn 16.35 and 16, while your max loss is .35 below 16 or above 20.

TRADE RATIONALE:  If you are a tech stock and can’t rally in this market you have a serious case of some terminal disease……I think it is safe to make the assumption that these guys have some serious problems and that if the market turns less rosey and JNPR pre-announces a negative Q1 in the next few weeks the stock will re-test the lows from the Fall around $18.00