F5 Funnels Profits From The Cloud

11/17/2014


  Recent Price
$126
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
23
  Shares (millions)
74
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$128.30 - $80.76

F5 Networks ($126; FFIV) took its name from the strongest class of tornado glorified in the movie Twister. The name seems appropriate, as F5 tries to exploit the perpetual upheaval wrought by the technology sector.

F5's hardware and software help improve the flow of data on corporate servers. These products manage traffic and provide services such as security screening and encryption. Customers include Facebook ($75; FB) and Pandora Media ($19; P), but you may have used F5 yourself during online activities such as trading stocks, buying airline tickets, or participating in social-networking sites.

The company is gaining market share via acquisitions and Cisco Systems' ($25; CSCO) exit from a key product segment. Revenue has advanced 17%, per-share profits 19%, and cash from operations 10% over the past 12 months. Recent operating momentum is complemented by rising earnings estimates, a strong balance sheet, and a reasonable valuation. F5 is a Buy and a Long-Term Buy.

Business breakdown

A string of high-profile hacker attacks has boosted demand for the company's security software. In addition, network requirements are becoming ever more complicated by the array of mobile devices and applications people now use.

Three worldwide distributors account for more than 40% of F5's sales. The company has also formed partnerships with IBM ($162; IBM), Dell, and Hewlett-Packard ($37; HPQ), which bundle F5's software with their own products.

To combat rising competition in cloud computing, F5 has expanded its offerings and launched a tiered pricing system. The volume of deals above $500,000 that F5 completed rose in the September quarter. However, virtual products command just 25% of the prices typically charged for physical appliances, putting long-term pressure on revenue and profits.

Management expects per-share profits to climb 20% to 22% this quarter on sales growth of 13% to 16%. That guidance has led analysts to nudge their estimates higher in the past month, though the consensus remains within management's targeted range.

F5 has topped its high estimate for both sales and earnings in each of the past four quarters, giving us confidence in the stock's near-term potential — though F5's track record has likely conditioned investors to expect another quarterly beat.

The stock trades at 23 times trailing earnings, 3% above the average S&P 1500 communications-equipment stock. F5 looks reasonably valued relative to its growth, with per-share profits projected to jump 17% over the next four quarters, well ahead of the peer-group average of 8% growth.

F5 produced $526 million in free cash flow over the last year, up 11%. Some of that cash funded buybacks that lowered the share count 5%.

Last month, F5 announced that CEO John McAdam, who has led the company since 2000, will step down in about a year. The lead time gives F5 some space to find a successor for McAdam. An annual report for F5 Networks Inc. is available at 401 Elliott Ave. W., Seattle, WA 98119; (206) 272-5555; www.f5.com.

F5 NETWORKS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '14
1.57
vs.
1.26
18%
128.30
-
108.03
25 - 21
Jun '14
1.39
vs.
1.12
19%
114.14
-
99.26
23 - 20
Mar '14
1.27
vs.
1.07
20%
116.71
-
87.47
25 - 19
Dec '13
1.22
vs.
1.14
11%
93.25
-
78.14
20 - 17
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
1.73
5.43
0.00
128.30
-
78.14
24 - 14
2013
1.48
4.59
0.00
108.37
-
67.53
24 - 15
2012
1.38
4.37
0.00
139.46
-
69.60
32 - 16
2011
1.15
3.78
0.00
145.76
-
69.01
39 - 18
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
86
52
96
97
94
89

   * Earnings exclude special items.
   † Quadrixscores are percentile ranks, with 100 the best.


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