2HRS2GO: Redback, Juniper under the microscope

COMMENTARY--Redback Networks and Juniper Networks watched their stocks dip, recover and then slide again this week after analysts offered up divergent opinions on the two network-equipment makers.

These are interesting times for a group of up-and-coming network-equipment makers that have enjoyed extended honeymoons as Wall Street darlings since their initial public offerings back in 1999.

But the dot-com shakeout and anemic U.S. economy have conspired to curtail their astronomical sales and earnings growth, eroding their lofty valuations and making companies such as Redback (Nasdaq: RBAK) and Juniper (Nasdaq: JNPR) fodder for all kinds of merger and takeover rumors.

In fact one of the hottest rumors winding through Wall Street in recent weeks had Juniper and Redback joining forces. Other stalwarts of the network-equipment space--including Nortel (NYSE: NT), Cisco Systems (Nasdaq: CSCO) and Alcatel (NYSE: ALA)--have reportedly been interested in Juniper, Redback or both.

With both stocks falling to or within a whisker of their 52-week lows, the rumors only intensify. Yet the same companies that might want to buy these companies on the cheap have their own problems.

Cisco, Nortel and Lucent Technologies (NYSE: LU) already scaled back their forecasts for the next couple quarters, sending all three stocks into a deep depression that even the most cautious investors never could have predicted.

The scrutiny was cranked up a couple notches this week when analysts lowered sales and earnings targets or cut 12-month price targets on both Redback and Juniper.

While maintaining his "outperform" rating and 12-month price target of $50 a share on Redback, Morgan Stanley analyst Christopher Stix lowered his first-quarter sales estimate to $125 million from $135 million and chopped his earnings estimate from 5 cents a share to a penny a share.

In his research report, Stix said that Redback still had two-thirds of its sales target for this quarter to meet with just one month to go.

"While this proportion of sales in the final month is similar to earlier quarters, the more challenging service provider environment has made the likelihood of an earnings shortfall higher," he wrote in a research note.

Lehman Brothers cut Redback from a "strong buy" recommendation to a "buy" and slashed its 12-month price target to $40 a share from $150 a share.

Redback shares drifted to a 52-week low of $19.81 Friday afternoon. This time last year, the stock was trading at $198.50 a share.

Juniper got mixed reviews this week after USB Warburg analyst Nikos Theodosopoulos chopped its price target to $250 to $100 a share.

Theodosopoulos predicted the telecom-equipment sector would enjoy sales growth of less than 10 percent in fiscal 2001, marking the first time since 1993 that sales didn't grow between 15 percent and 25 percent for the year.

"Given the rationalization under way in the service-provider market, we do not think 2002 will have a resumption of growth to 15 percent-plus either," he wrote in a research note. "We believe service-provider rationalization is likely to cause more disruptions in equipment spending through at least 2002."

Meanwhile, two analysts reiterated their "strong buy" recommendations on Juniper.

"While our current $150 price target may be aggressive, we believe that based on a 50 percent growth rate and even a multiple of that, the stock should be at $80 in less than 12 months, representing significant upside from Friday's closing price," wrote CS First Boston analyst Lissa Bogaty in a research note. "With some multiple appreciation, the stock should rise even higher."

Bogaty said she expects Juniper to post fiscal 2001 sales of between $1.6 billion and $1.7 billion, above the First Call consensus estimate of $1.55 billion. She sees earnings coming in between $1.15 and $1.25 a share, also above the consensus estimate of $1.06 a share.

Lehman Brothers analyst Mark Sue also reiterated his "strong buy" recommendation, saying the stock's recent weakness represents a good opportunity.

"Shares of Juniper Networks were off sharply during Friday's trading session due to rumors of a pre-announcement and yet another rumor related to an acquisition of Redback Networks," Sue wrote in a research note. "We believe these rumors are without merit and we would view the weakness as a buying opportunity. While visibility may have declined somewhat from the strong levels seen earlier in the quarter, we believe financially healthy carriers who represent the bulk of Juniper's revenues continue to build out their IP backbones."

Sue, who maintains a 12-month price target of $100 a share, said Juniper continues to chip away at Cisco's lead in the core router market without dramatically slashing prices.

Despite all the economic unrest, Juniper actually raised its first-quarter and fiscal 2001 sales targets following its strong fourth-quarter earnings report.

Juniper shares, which peaked at $244.50 in October, were trading at $57.44 Friday afternoon.