Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – January 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Juniper Networks Inc. (JNPR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Juniper Networks, Inc. designs, develops, and sells products and services for high-performance networks, to customers. The Company’s routing, switching and security products address the networking requirements of global service providers, enterprises, governments, and research and public sector organizations. The Company does its business in three geographic regions: Americas, Europe, Middle East; Africa (EMEA), and Asia Pacific (APAC). The Company operates two segments: Platform Systems Division (PSD) and Software Solutions Division (SSD). Its PSD segment offers scalable routing and switching products that are used in service provider, enterprise, and public sector networks to control and direct network traffic between data centers, core, edge, aggregation, campus, Wide Area Networks (WANs), and consumer and business devices. Its SSD segment offers solutions focuses on network security and network services applications for both service providers and enterprise customers.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$3.45|
|Value Based on 0% Growth||$2.02|
|Market Implied Growth Rate||43.50%|
|Net Current Asset Value (NCAV)||-$1.20|
Balance Sheet – December 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Juniper Networks Inc. is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years, short dividend history, and the high PEmg ratio. The Enterprising Investor is concerned with the lack of earnings growth or stability over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $0.59 in 2010 to only an estimated $0.24 for 2014. This level of growth does not support the market’s implied estimate of 43.5% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.
Be sure to check out previous ModernGraham valuations of Juniper Networks Inc. (JNPR) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Juniper Networks Inc. (JNPR)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Juniper Networks Inc. (JNPR) at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.