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. 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 fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Juniper Networks, Inc. (Juniper Networks) designs, develops, and sells products and services that together provide its customers with network infrastructure. It operates in two segments: Infrastructure and Service Layer Technologies (SLT). The Company’s Infrastructure segment primarily offers routing and switching products that are used to control and direct network traffic from the core, through the edge, aggregation, and the customer premise equipment level. Infrastructure products include its Internet protocol (IP) routing, carrier Ethernet routing portfolio, and Ethernet switching portfolio. Its SLT segment offers solutions that meet a range of its customers’ priorities, from protecting the users, applications and data on the network itself to providing network services across a distributed infrastructure. Effective September 13, 2013, Juniper Networks, Inc. acquired Contrail Networks Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- 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 = 4/5
- 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 – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$10.24|
|Value Based on 0% Growth||$6.00|
|Market Implied Growth Rate||13.75%|
|Net Current Asset Value (NCAV)||$1.37|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Juniper Networks is suitable for the Enterprising Investor but not the Defensive Investor. For the Defensive Investor, the company has shown insufficient earnings stability or growth over the ten year historical period, does not pay dividends, and is trading at a high PEmg ratio. For the Enterprising Investor, the only qualm is the lack of dividend payments. As a result, Enterprising Investors should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Cisco (CSCO) and ModernGraham’s valuation of International Business Machines (IBM). From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.25 in 2009 to $0.71 in 2013. This demonstrated level of growth supports the market’s implied estimate of 13.75% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the market price.
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 (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.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in Juniper Networks (JNPR) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.