When I made the comment a few months back that semis are going to be in pain into earnings, I wasn't so sure about non-Semi companies having such difficult time but even non-semis have had a tough time. I pointed out late last year that tech was ahead of itself and street estimates were ahead of reality especially in semis. Even with the recent sell off, tech is still trading at significant premium(28X) to non-tech while its forecasted to grow less than 1% faster in 2005. But with the situation with Iraqi elections looking like a positive, expect market to trade higher in the near-term.
I won't try to talk about which companies had bad earnings. Let's try to find companies that reported strong quarters and have differentiated offering to make them winners over time. We are going to continue to focus on tech areas/companies that are growing faster than the market but are not selling at a huge premium. Quality deserves premium valuation but I am not going to play through the nose. The areas I would focuse on are IP related, security, offshore, digital consumer. We talked about some of these issues in my piece
on what to expect this year.
Lets begin with IP related services which include JNPR
that reported earlier this month. Both companies had above expectations quarter, both companies are very tech-saavy and are ahead of competition in their core area of expertise and as you would expect are under constant competitive threat. JNPR
had a strong quarter in routing and security turned around nicely as well. What makes JNPR
special is that its technology is being deployed by all major carriers around the world and its adding security and most probably will offer (switching/ higher level services) . JNPR
plays well in all the hot growth markets but that puts it on the radar of bigger competitors. CSCO
has made JNPR
its main target and their is no doubt that this battle will lead to some pricing pressure for both. Margins is where the story gets tough for JNPR
, with 70% GM and 30% operating margins the operating leverage will be tough to grow but JNPR
management is usually conservative. Given the guidance for next quarter, the incremental gross margin is basically nil. Revenue growth will be the major driver of EPS going forward. Even with all these issues, I believe JNPR
can outperform the market given that revenues are expected to grow 48% in 2005 and stock trades at 38x (on EPS estimates that will surely move higher) and I would be a buyer.
is another company that has performed very well in a niche market, just like JNPR
did in its early days. FFIV
makes what is known as layer 4 to 7 appliances which add intelligence to the traffic flowing in corporate LANs and WANs. FFIV
also makes security appliances but recent results for security were little weak. Overall the results were more than stellar revenues grew 20% sequentially. Reported revenues for December were same as what the street expected FFIV
to achieve by' June 05, and guidance for March is equivalent to what the street expected FFIV
to do in Dec 05 -- now that is serious outperformance. FFIV
gross margins are also a stellar 77%, and operating margins are at 24%. The issue remains with the security products sales that failed to reach management's goal. Security remains one of the hottest markets and for now FFIV
can grow rapidly even without Security but sooner or later management has to realign the sales force and the channel to also focus on Security products. FFIV
is expected to grow its revenues 43% in 2005 and trades at 40x (not exactly a cheap valuation), so look to buy on pull backs to mid $30 level.
I look forward to hearing from investors regarding companies they feel have similar characteristics to the ones mentioned above.