By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Elliott Management discloses stake in Juniper Networks
Elliott Management, an activist hedge fund firm managed by Paul Singer, disclosed a 6.2% stake in shares of networking equipment provider Juniper Networks, Inc. (NYSE:JNPR). According to a presentation that was published together with an SEC filing, Elliott Management started accumulating Juniper Networks shares on November 5th, 2013. From this date until the filing date, the company’s weighted average daily share price was approximately $21.01, which can be used as a proxy for activist hedge fund’s cost of shares. Reacting to the disclosure of a stake by the activist, shares of Juniper Networks climbed 7.56% and closed at $25.32, which reflects a return of 21% from the approximate cost of shares.
Juniper Networks: Investment thesis
In its investment presentation, Elliott Management emphasized significant underperformance of Juniper Networks, Inc. (NYSE:JNPR)’s stock price compared to peers as well as major market indexes. For a five year period ending November 4th, 2013, the company’s stock underperformed its primary peer group by 153% and the S&P 500 Index by 98%. The hedge fund firm outlined three initiatives that Juniper should implement in order to unlock value for shareholders.
These three initiatives are: cost realignment and focus on cost savings, capital return program and product portfolio optimization which requires Juniper to focus on projects and areas where the company has clear competencies and greater risk-adjusted return on investments. Leaving the first and third initiatives aside, the capital return program demanded by Elliott Management represents a key element in this activist campaign and a key part of the investment thesis. J
Juniper Networks currently has on its balance sheet cash and equivalents of $2.85 billion, long-term debt of $1 billion, and long-term investments of $1.2 billion. Summing up these three figures gives $3.03 billion which represents 24% of company’s market capitalization. In terms of valuation, the company trades at an EV/EBITDA multiple of x14.5 (based on first nine months of 2013 annualized results and an enterprise value adjusted for long-term investments). Let’s see if it is possible to take the activist hedge fund’s idea and improve upon it by investing in Cisco Systems, Inc. (NASDAQ:CSCO), another network equipment company.
Juniper Networks and Cisco alternative
Cisco Systems, Inc. (NASDAQ:CSCO) is a leading company in the networking equipment space. As of January 13th, 2014 close, it had a market capitalization of $118.6 billion. On the balance sheet side, Cisco has $48.2 billion in cash and equivalents, and $16.2 billion in short and long-term debt. Net cash therefore stood at $31.98 billion, which represents 27% of company’s market capitalization, a higher figure than Juniper Networks, Inc. (NYSE:JNPR)’s case. In terms of valuation, company trades at an EV/EBITDA multiple of x6.4 only (based on fiscal year ended July 27th, 2013 results). Company has a much stronger free cash flow generation ability than Juniper as can be seen from recent EV/FCF multiples: it is x27 for Juniper while Cisco has an EV/FCF multiple of x7.4. According to Barron’s, Cisco shares could return 20% over the coming year because many risks seem to be factored in as shares sell for just 11 times projected earnings for calendar 2014, a 30% discount to S&P 500 Index. Perhaps it is time for a proactive approach instead of just blindly following activist hedge funds. Cisco might just be such an opportunity.