NetGear, Inc. (NASDAQ:NTGR) is what I refer to as an “under the radar” stock. This is a company whose products are very widely used (either you or someone very close to you most likely has a NETGEAR router in the house), but the stock doesn’t get much coverage in the media or on investment websites. With the company set to report earnings on Friday, I thought now was a good time to discuss this company and its prospects for the future.
About NETGEAR
NetGear, Inc. (NASDAQ:NTGR) is one of the market leaders in networking products for home and business users. The company makes both wired and wireless products for Ethernet networking, broadband access, and network storage. Basically, if you need to do having to do with getting online or on a network, NETGEAR’s products can help.
Lately, the company has had issues with lower-than-expected shipments, but I think this is temporary. NetGear, Inc. (NASDAQ:NTGR) has a solid history of growing its earnings, and held its own during difficult economic times, as seen in this chart of the company’s revenues over the last decade.
Valuation and Growth Projections
NETGEAR trades for a very reasonable valuation of just over 10.5 times last year’s earnings, which looks even better when you consider that the company has $377 million in cash and no debt, and a market cap of just over $1 billion. Backing cash out of the equation, and the market is valuing NetGear, Inc. (NASDAQ:NTGR)’s business alone at just 6.8 times earnings.
The consensus is for earnings of $2.56 this year, growing to $2.95 and $3.06 in 2014 and 2015 respectively, for average earnings growth of 9.5% annually, which is excellent for a company that is so cheaply valued.
The competitors
To see how expensive or not NETGEAR is compared to its peers, let’s take a quick look at two other networking companies, F5 Networks, Inc.
(NASDAQ:FFIV) for a more direct comparison and Cisco Systems, Inc. (NASDAQ:CSCO), the largest networking company.
By market capitalization, F5 Networks, Inc. (NASDAQ:FFIV) is about five times the size of NetGear, Inc. (NASDAQ:NTGR). The company makes application delivery networking products to help manage traffic to servers. Unlike NETGEAR, F5’s products are geared primarily towards enterprise customers. F5 Networks, Inc. (NASDAQ:FFIV) trades at a seemingly high 20.4 times TTM earnings, and with a consensus forward earnings growth rate of just over 10%, so it does appear a bit expensive.
On the other hand, Cisco Systems, Inc. (NASDAQ:CSCO) seems more reasonably valued at 11.8 times TTM earnings, and are projected to grow by 7.2% annually over the next few years.Cisco Systems, Inc. (NASDAQ:CSCO) is the world’s largest supplier of computer internetworking systems, and with their size and leading position comes a little less risk. One of my favorite things about Cisco Systems, Inc. (NASDAQ:CSCO) is its amazing balance sheet, which has almost $50 billion in cash and about $16 billion in debt for an amazing net cash position of $34 billion! The tradeoff to this stability is a lower potential for future growth, as Cisco Systems, Inc. (NASDAQ:CSCO) (with almost half of its sales coming internationally) doesn’t have nearly as much room for worldwide expansion as the other two companies featured here.
What to watch for on Friday
NetGear, Inc. (NASDAQ:NTGR) actually announced preliminary earnings data last Monday, so we won’t see any surprises, numbers-wise. The company expects revenues in the range of $290-295 million, and earnings per share between $0.45 and $0.50 per share, less than the consensus of $0.56. The stock immediately (over)reacted, falling over 10% after the announcement.
The company attributes the low numbers to difficulty in transitioning their ReadyNAS line, and was not able to keep up with demand. They anticipate a full recovery of supply for the rest of the year, and I would like to hear more about their progress toward this during the earnings call.
With shares sitting just above their 52-week lows, and down over 30% from just three months ago, I feel confident in saying that the market over-reacted to a bad quarter and I feel confident in calling the stock a buy before the earnings report.
The article This Under-Appreciated Networking Company Deserves a Look originally appeared on Fool.com is written by Matthew Frankel.
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