Analysts' Choice: F5 Undersells Its Own Potential

3/28/2016


  Recent Price
$103
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
15
  Shares (millions)
70
  Long-Term Debt As % Of Capital
0%
  52-Week Price Range
$135.20 - $86.03

In late January, F5 Networks ($103; FFIV) projected March-quarter growth of 2% to 4% in sales and 1% to 3% in per-share profits, both targets well below analyst expectations at the time. Two days after the disappointing guidance hit Wall Street, the shares had gained 4%; they're now up 14% from preannouncement levels.

Credit at least part of the strength to F5's history of understatement. The company has sandbagged on guidance in the past and in January called its own targets "conservative."

The stock is a Buy and a Long-Term Buy.

What the company does

F5 has carved out a business model connecting technological territory that didn't exist a decade ago. The company's hardware and software help clients deliver services over the internet, managing user traffic to enhance availability, speed, and security.

Over time, businesses' goals change — managing more complex systems, squeezing more customers through a single system, or making services available on a wider range of physical and internet sites. As the technology industry shifted to a software-as-a-services business model in recent years, so did F5. In the December quarter, F5 generated 52% of its revenue from services, with the remaining 48% from products. Services accounted for 46% of revenue in the same quarter two years ago and 35% five years ago.

Going forward, expect services to continue increasing revenue share, and expect security to grab a bigger piece of the services pie.

Reasons for confidence

While profit growth has slowed in recent quarters, F5 last posted a decline in the June 2013 quarter, and its sales have risen in 26 consecutive quarters. Operating cash flow jumped 28% in the last 12 months and 19% annually over the last five.

Given F5's history of aggressive growth and conservative projections, analyst targets for fiscal 2016 ending September (sales up 4% and profits 5%) seem unduly conservative. Here are just three reasons for our confidence:

• F5 closed out fiscal 2015 with $783 million in deferred revenue, up 23% from a year earlier, mostly in the form of service maintenance contracts. The company will fulfill those contracts over time, generating a stream of revenue less risky than sole reliance on new business.

• In 2015 the company introduced two offerings designed to operate in both on-site data centers and public clouds. With hybrid hardware/software computing models becoming increasingly popular, F5 now generates more than one-third of its revenue from high-margin software, a percentage likely to rise going forward. The software-only Virtual Edition product managed 99% sales growth in the last fiscal year.

• In January, F5 touted a rich pipeline of new and refreshed products, pitching the second half of fiscal 2016 (April through September) as "another inflection point in F5's history as a growth company." After a statement like that, no wonder investors didn't take the weak sales and profit guidance at face value.

You can acquire an annual report for F5 Networks Inc. 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
Dec '15
1.70
vs.
1.55
6%
123.25
-
94.51
19 - 14
Sep '15
1.84
vs.
1.57
8%
135.20
-
111.43
21 - 17
Jun '15
1.67
vs.
1.39
10%
128.08
-
111.33
21 - 18
Mar '15
1.59
vs.
1.27
12%
132.99
-
108.60
23 - 19
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
1.92
6.62
0.00
136.11
-
106.82
21 - 16
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
86
43
71
96
94
62
54

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


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com