Wednesday, March 21, 2007

Network Stocks: A View From Washington

For investors with a Washington focus, the business of networks and network gear ought to be an area of interest. Even with budget outlooks getting cloudier, civilian, intelligence and military agencies face unrelenting pressure to improve and secure the way they communicate with data, video and voice.

"A lot of the routed networks out there are kind of long in the tooth," says Robert Stevens, a vice president at Juniper Networks and the head of its federal government business. "It's time to upgrade."

In terms of placing your bets, two competitors stand out here: Juniper and Cisco Systems. Which stock looks more attractive now? The metrics give mixed signals.

In the realm of price-to-earnings ratios, the advantage goes to Cisco. Based on consensus earnings forecasts for the next two fiscal years, Cisco's P/E multiples are 20 and 17, respectively. Juniper now carries equivalent multiples of 23 and 19.

But Juniper looks cheaper by other measures. Its price-to-book ratio now stands at 1.7, versus 6.0 at Cisco. The stock also looks relatively less expensive according to the price-to-sales, price-to-cash flow (in the sense of net income plus depreciation) and enterprise multiples. The latter is defined as enterprise value (market value plus net debt) divided by earnings before interest, taxes, depreciation and amortization. Juniper's enterprise multiple is just 4.9, versus 14.1 for Cisco.

Given the split decision in the numbers, the investment decision may boil down to a simple choice: incumbent or insurgent?

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