Juniper a catalyst for industry comeback?

Juniper Networks may have given Wall Street and the tech sector a reason to be optimistic about the networking equipment industry.

On Friday, investors boosted shares in the maker of high-end routers more than 26 percent, adding more than $1.4 billion to Juniper's market value. Juniper reported third quarter pro forma earnings of 10 cents per share--3 cents higher than expected.

But as with many financial reports, the important information lies in what's ahead. So far, Juniper seems to be at least one example of a networking equipment company that's digging out--evidence that perhaps some sectors in the depressed technology world might be hitting bottom--and are getting ready to recover.

Juniper predicts fourth-quarter revenue will be about the same as the third quarter's $201.7 million. Flat growth in the last three months of the year--normally Juniper's strongest quarter--might not sound impressive. But it would mark the first time in three quarters that Juniper's revenue hasn't declined.

"We now think there is credible evidence that Juniper's business has stabilized, at least over the next quarter," said Hasan Imam, analyst with Thomas Weisel Partners. "The real question is, 'is this a false start (of a sales rebound)?' We do not think so."

Although Imam doesn't think Juniper is seeing a false start in sales, the company still has challenges ahead.

For starters, Juniper is in a fierce battle with Cisco Systems for market share. Recent market research reports indicate Cisco has regained some of the market share lost to Juniper over the past year. Juniper executives declined to provide an estimate of their stake in the market.

And then there are worries about the overall economy. Telecommunications equipment spending is expected to remain light. It's also uncertain whether the tech sector will respond to fiscal stimulus from Congress and Federal Reserve interest-rate cuts.

Juniper Networks Stock price from October 2000 to present.
Source: Prophet Finance

Despite the economic turmoil, Juniper correctly forecast its revenue in the September quarter, a time period that was expected to be wildly unpredictable. Juniper's ability to hit its financial targets in uncertain economic times should give investors more confidence, Imam said.

"Management guidance has more credibility," he said.

Other figures lend credence to the idea of a relatively strong fourth quarter. Juniper's latest book-to-bill ratio remained greater than one, meaning the company is taking in more orders than it can fill in the same period. Some analysts pointed out that book-to-bill ratios mean less than they used to, as many customers now order equipment such as routers as needed instead of stockpiling. But the fact remains that demand in the third quarter was at least slightly ahead of production.

Even the Sept. 11 terrorist attacks didn't disrupt the company's plans. "We'll see what the future holds, what the longer-term macro consequences might be, but we did not see our business affected one way or the other," Juniper CEO Scott Kriens said in response to a question about the attacks during the third-quarter call.

Supply and demand
The widely reported glut of long-haul bandwidth doesn't directly translate into lower demand for high-end routers, analysts said.

Since building networks is expensive and time-consuming, companies often install an abundance of fiber all at once to meet future demands. But companies only connect routers and other equipment to that fiber as traffic requires, especially in the case of the cutting-edge optical networks that use high-end routers.

So even though demand fell this year in Juniper's market niche, it didn't decline as much as other parts of the overall data networking industry, analysts said.

"Excess transport capacity doesn't equal excess routing capacity," said Natarajan Subrahmanyan, an analyst with Goldman Sachs. "While there is some excess capacity in the routing layer, we believe capacity excesses are much greater in the transport layer."

Whether Juniper's comparatively optimistic outlook for the next few months can boost the stock beyond its current price is an open question. While most analysts believe sales should pick up, they remain divided on whether the stock is fairly valued.

Regardless of how Juniper's stock performs, the company's business strength could provide a glimmer of hope for others. Rivals such as Cisco could be the next networking equipment company to benefit.

Juniper's suppliers might also be smiling. Contract-electronics manufacturers such as Solectron and Celestica, which supply circuit boards for Juniper's routers, would benefit from an increase in Juniper's sales.

"The importance for contract manufacturers is the sequential trajectory of customers' business," said Paul Fox, analyst with Banc of America Securities.