Analysts' Choice: F5 Looks To Extend 2016 Rally

1/16/2017


  Recent Price
$144
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
20
  Shares (millions)
66
  52-Week Price Range
$148.34 - $86.03

Many consumers encounter F5 Networks' ($144; FFIV) technology without ever knowing it. The company's products help data centers complete online transactions, ranging from buying airline tickets to using social-networking websites.

F5 has grown revenue, operating cash flow, and free cash flow in each of the past 14 fiscal years. Operating momentum slowed in fiscal 2016 ended September, as all three metrics rose just 4%. But growth is expected to accelerate in fiscal 2017, with analysts projecting 7% higher sales and 13% higher earnings per share.

The stock performs well in Quadrix, scoring above 60 for all six categories and earning an Overall rank of 95. Both sector-specific ranks exceed 85. F5 is a Focus List Buy and a Long-Term Buy.

A traffic cop for data centers

F5 builds application-delivery controllers (ADCs) that direct data traffic to computer servers. ADCs also manage server workloads and identify security threats. Historically, these devices have taken the shape of electronic boxes, though software is now becoming an attractive alternative for some customers.

ADC software carries lower prices than the hardware, weighing on F5's sales. Management insists that profits remain the same, though there are some concerns that F5's premium-pricing advantage will erode over time.

Still, F5 is riding a wave of new-product introductions, aimed at improving automation capabilities for traditional data centers and helping clients shift their workloads to the cloud. The company also plans to launch a new security platform in the March quarter.

As a kicker, the stock offers additional appeal as a potential takeover target. F5 has reportedly attracted interest since 2010 from suitors including Juniper Networks ($28; JNPR), IBM ($168; IBM), and Oracle ($39; ORCL). Fresh reports surfaced in June that F5 had hired Goldman Sachs ($246; GS) to evaluate acquisition offers, including one from a private-equity firm.

F5 has a stock-market value of $9.54 billion, a manageable acquisition size for many technology companies. It also boasts a strong balance sheet (net cash exceeds $13 per share) and generates plenty of free cash flow.

The stock appears reasonably valued, even after rallying 56% in the past year. Just seven technology stocks in the S&P 500 Index have a free-cash-flow yield (12-month free cash flow divided by market value) higher than F5's 6.8%. At 20 times trailing earnings, F5 shares trade above the median of 18 for S&P 1500 communications-equipment stocks but below their own five-year median of 26.

Conclusion

F5 will report December-quarter results on Jan. 25. Consensus estimates project per-share profits of $1.94, up 12%, on revenue of $518 million, up 6%. Although F5 said in October that some of its financial customers had postponed projects due to the U.K.'s decision to leave the European Union, management reaffirmed its guidance in November.

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 '16
2.11
vs.
1.84
5%
127.13
-
110.86
18 - 16
Jun '16
1.81
vs.
1.67
3%
124.91
-
93.64
18 - 14
Mar '16
1.68
vs.
1.59
2%
106.86
-
86.03
16 - 13
Dec '15
1.73
vs.
1.55
6%
123.25
-
94.51
19 - 14
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
2.00
7.30
0.00
127.13
-
86.03
17 - 12
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
80
61
95
91
95
70

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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