Why This Analyst Team Sees Cisco and Juniper Both Winning Simultaneously

When one tech giant is given a positive analyst call, it can frequently be because one is taking market share from a key rival. So, what are investors supposed to make of it when one analyst team upgraded Juniper Networks Inc. (NYSE: JNPR) ahead of the Cisco Systems Inc. (NASDAQ: CSCO) earnings report, and then the same research team remained very positive on Cisco after the earnings report?

Merrill Lynch’s tech and communication team raised Juniper to Buy and maintained its Buy rating on Cisco within 48 hours around Cisco’s earnings report.

Juniper has been considered “the smaller Cisco” for years. The two companies have competed for years as well, with Cisco being larger and generally being considered as having a broader offering. Can both companies grow at the same time when giant telecom and communications orders are highly competitive? 24/7 Wall St. has highlighted why Merrill Lynch sees room for both Juniper and Cisco to grow simultaneously.

Juniper Networks was raised to Buy from Neutral on Tuesday, just a day before Cisco’s earnings. The Merrill Lynch price objective was also raised to $34 from $27, versus a prior $27.09 closing price, with a note that a broad new product cycle covers multiple domains around a new spending recovery.

The team said:

Our upgrade is based on our anticipation that core business lines will inflect and return to year over year growth later this year, driven by a plethora of new product releases and sequential growth in North America carrier spending. Additionally, following Juniper’s restructuring and share buybacks, operating margins and earnings per share (EPS) leverage should be enhanced. New products touch all areas including switching, edge and core routing, security, and NFV.

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That new $34 price objective is based on based on 16 times the firm’s 2017 EPS estimate of $2.13. This was said to be in line with Juniper’s trailing average of 17 times over the past five years. With a needed refresh, there was a potential inflection in three core businesses: switching, security and routing.

The firm said:

We believe the company’s three core product lines will reach an inflection and return to growth over the next few quarters. Catalysts for growth include expected increases in carrier capex for the remainder of the year and new products that have a strong performance advantage. Headwinds to Juniper’s security business should also end with the winding down of old businesses and the previous disposition of Pulse.

Juniper’s five-year decline in security was attributed to an aging SRX platform that lost its luster, but that is now being upgraded. Still, they do address a competitive landscape today. The success of its switching portfolio has been lackluster so far, and new products from Dell, HP and revamped Cisco only make things more challenging. Lastly, the security market is competitive and Juniper will have to prove its throughput advantage outweighs the platform approach of other vendors.

Cisco shares were reiterated as Buy and with the same $32 price objective. That implied upside of about 10% from the $29.10 late-Thursday share price, without taking the 3% yield from the dividend into consideration. Merrill Lynch’s implied upside on Juniper was closer to 25%, if you include Juniper’s 1.5% yield.

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While Merrill Lynch called John Chamber’s last full quarter as CEO a solid one, the firm also said that its main product lines still in transition. The team said:

The company continues to execute reasonably well, yet the trends are somewhat mixed. On a year over year basis, we saw growth in every business except SP video. However, similar to last quarter, we mostly attribute this to easy comps, with the sequential trends more mixed. Switching, collaboration, data centers, wireless and security were all down quarter over quarter, with switching and security down for two consecutive quarters. It’s hard to read into the sequential trends given a lack of historical seasonal consistency and management’s commentary on strong order trends, yet holistically, we flag the associated risks.