Cisco Systems, Inc. (CSCO), Juniper Networks, Inc. (JNPR): This Just In: Upgrades and Downgrades

Page 1 of 2

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and “initiating coverage at neutral.” Today, we’ll show you whether those bigwigs actually know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS to track the long-term performance of Wall Street’s best and worst.

Who’s hot, who’s not — in Internet stocks

Cisco Systems Inc. (CSCO)

“Woe unto you! The end is nigh, declareth FBR Capital!” That’s basically the headline from Thursday’s twin downgrades of Juniper Networks, Inc. (NYSE:JNPR) and Cisco Systems, Inc. (NASDAQ:CSCO), courtesy of Arlington, Va.-based investment banker FBR. So what does FBR have against two of the best-known and best-respected names in Internet backbone-building? Simply put, their business models are about to get upended.

StreetInsider.com gives us the lowdown on FBR’s thinking: “We believe Cisco will become increasingly more challenged to offset weaker-than-expected routing and switching demand as … technological trends … significantly blur the lines between routers, switches, and servers.”

According to the analyst, telecom providers will more and more cut the number of routers and switches they buy. (Hint: Cisco and Juniper sell routers and switches). Meanwhile, sales of what routers and switches they do buy will increasingly get eaten up by “new competitive products and vendors” selling “white box, lower-margin product.” (“White box” is basically a tech industry term for generic, non-brand-name equipment).

And why is this bad?
Assuming FBR’s right in its analysis, this is bad news for two reasons. First, lower sales of routers and switches means, almost by definition, lower revenues for Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR). Second, if FBR’s right about telecoms being willing to buy product from non-brand-name manufacturers, then increased competition is likely to hinder pricing power and squeeze profit margins at the two tech giants. This is why FBR is recommending that you sell both stocks.

Yet in this world of ours, there are stocks you might want to consider selling, and stocks you must sell now. Cisco might be the former. Juniper is definitely the latter. Here’s why.

The risky play
Priced at 54 times earnings, Juniper Networks, Inc. (NYSE:JNPR) shares are wildly overpriced for the mere 15% long-term growth that most analysts think the company is capable of producing. Indeed, valued even on its more robust free cash flow, the company sells for a 32 multiple and is probably overpriced by a factor of two — that’s if FBR is wrong about the “white box” threat. If it’s right, then things are even worse than they look.

The defensive play
The situation with Cisco is a bit better. Priced at only 12 times earnings today, and with a price-to-free cash flow ratio that’s even lower, this stock already has a lot of the white-box-threat priced into it. Cisco Systems, Inc. (NASDAQ:CSCO) also pays a tidy 2.6% dividend yield — Juniper Networks, Inc. (NYSE:JNPR) yields zilch — and has modest growth expectations to fulfill — only 8.4%.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!