F5 Networks (FFIV) Annual Valuation – 2014

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 5 Undervalued Companies for the Defensive Investor.  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 F5 Networks fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): F5 Networks, Inc. is the developer and provider of application delivery services. The Company’s core technology is a full-proxy, programmable, software platform called TMOS (Traffic Management Operating System). The Company’s principal products are Application Delivery Controllers (ADCs). The Company’s TMOS-based offerings include software products for local and global traffic management, network and application security, access management, Web acceleration and a number of other network and application services. These products are available as modules that can run individually or as part of an integrated solution on the Company’s high-performance, scalable, purpose-built appliances and chassis-based hardware, or as software-only Virtual Editions designed to run on standard servers and hypervisors.

FFIV data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
5. 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 – PASS
6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – FAIL
5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price	$103.01
MG Value	$134.57
MG Opinion	Fairly Valued
Value Based on 3% Growth	$50.68
Value Based on 0% Growth	$29.71
Market Implied Growth Rate	10.49%
Net Current Asset Value (NCAV)	$1.45
PEmg	29.47
Current Ratio	1.42
PB Ratio	5.39

Balance Sheet – 12/31/2013

Current Assets	$870,900,000
Current Liabilities	$614,000,000
Total Debt	$0
Total Assets	$2,214,800,000
Intangible Assets	$523,700,000
Total Liabilities	$760,800,000
Outstanding Shares	76,040,000

Earnings Per Share

2014 (estimate)	$4.06
2013	$3.50
2012	$3.45
2011	$2.96
2010	$1.86
2009	$1.14
2008	$0.89
2007	$0.90
2006	$0.80
2005	$0.67
2004	$0.46

Earnings Per Share – ModernGraham

2014 (estimate)	$3.50
2013	$3.00
2012	$2.52
2011	$1.89
2010	$1.28
2009	$0.95

 

Conclusion:

F5 Networks is not suitable for either the Defensive Investor or the Enterprising Investor.  From the Defensive Investor’s angle, the company’s current ratio is too low, it does not pay dividends, and is trading at high PEmg and PB ratios.  The Enterprising Investor doesn’t care about the PEmg and PB ratios, but the current ratio is still too low and the lack of dividends is a concern.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Cisco Systems (CSCO) and ModernGraham’s valuation of Juniper Networks (JNPR).  As for a valuation, the company appears to be fairly valued currently, having grown its EPSmg (normalized earnings) from $1.28 in 2010 to an estimated $3.50 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 10.49% 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 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 F5 Networks (FFIV)?  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.

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Disclaimer:  The author did not hold a position in F5 Networks (FFIV) 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.