Juniper Networks (JNPR) decided to part ways with its CEO of just one year. In an announcement on Tuesday, November 11, 2014, the company stated it was naming Rami Rahim, a longtime executives, as the new CEO. It replaced Shaygan Kheradpir after a short tenure. His lack of leadership and the mishandling of a customer were cited as reasons. Mr. Kheradpir joined Juniper after serving as CTO of Barclays and previously as the CIO of Verizon Communications. Mr. Rahim has a 17 year tenure with Juniper and was most recently the Executive Vice President and General Manager of Development and Innovation. On the conference call, analyst questioned why the company had not named Mr. Rahim a year-ago.
Wall Street has negatively viewed the management teams that have been in place at Juniper since 2008. They have over promised and under delivered on growth projections, new products, and in other areas. The change in CEOs is positive and with such low expectations on Juniper by the Street, the shares can outperform.
Activist Shareholders are Involved
The company is the target of two activist investors, which could help unlock value for shareholders and has led to increased pressure for improving results at Juniper. Elliott Management held an 8.7% stake based on the most recent filings. In addition Jana Partners also holds a position in Juniper. Both Elliott and Jana are pushing for share repurchases and cost-cutting at the networking hardware manufacturer. Their efforts are ongoing with Jana reportedly acquiring its stake and making its wishes known in January of this year, after Elliott had already done so.
If Mr. Rahim can garner the support from the two activist funds and drive cost cutting while providing better leadership at the firm, shareholders could be rewarded. Juniper already announced a buyback program and dividend earlier in the year, a positive use of cash for shareholders. That said, Mr. Rahim did state that he will maintain the company’s current strategy, which includes a commitment to the security business. Elliott has pressured Juniper to review this business line, which means it wants the company to exit it in some fashion.
Timing is Right to Focus on Operations & Cost Cutting
Juniper and other networking hardware companies like Cisco Systems (CSCO) are no longer on the leading edge of technology development. Their markets are closer to maturity for the most part, and as a result efforts should focus more on being top tier operators than either has in the past. While growth efforts and R&D remain important, they deserve more equal weighing with operational efficiency. Investors have focused on reducing overhead and cost cutting at both of these firms. Shareholders could see improved earnings and cash flows through the higher resulting margins. The Street currently flattish margins or margin contraction.
Overhang from SEC Investigation of Foreign Bribes
The SEC announced in August 2013 that it is investigating Juniper for possible violations of the U.S. Foreign Corrupt Practices Act. The investigation into the bribery of foreign officials to win business deals is well known and likely priced into the shares at this point. We do not see it as a significant downside risk.
Upgrade by Nomura to Buy
Nomura Securities analyst, Stuart Jeffrey upgraded the shares to Juniper to a Buy rating following the CEO change. The impression is that Nomura lacked any confidence in Mr. Kheradpir and his leadership team to execute and navigate the near-term headwinds or achieve long-term goals. In addition, management over the past 5+ years has consistently over promised and under delivered. It consistently set high expectations for new product launches which typically disappointed. Since they were outsiders to the industry prior to joining Juniper, they misunderstood the market and what to expect. Because it is the technology business, they assumed that should mean new products experience rapid growth. There was not an understanding that the networking business is largely mature at this point.
However, Nomura believes Mr. Rahim improves the company’s chances for growth, and cites his experience in the industry at Juniper, and leading the successful execution of production development as well as rationalizations in the past. Mr. Rahim as an industry insider can better set Street expectations and handle the business as it is.
Stock is not Priced for Growth, Street has Low Expectations
Management has established a CAGR target of 3% – 6% through 2017. The Street, based on current valuation, does not believe Juniper can hit this target. Nomura stated in its upgrade note that a 2% CAGR is more likely and if realized would provide upside to the shares based on resulting 2017E EPS of $2.12.
The company also has new product launches planned for 2015 to help it achieve revenue growth targets. IT has not provided detailer around the introductions but any successful launch or innovation could results in upside to the depressed share price
Juniper trades at 12.5x 2015E EPS and has an EV/EBITDA of 10.7x. This compares to Cisco, its closest competitor which trades at 11x FY16E EPS (July year-end) and an EV/EBITDA of 7.6x. The PEG based on the 5-year expected growth rate at Juniper is 1.4x versus Cisco at 1.5x. Nomura established a twelve month $25 price target, which is 12x 2016E earnings discounted at a WACC of 10% to 2015 year-end. It assigns a $2.60 per share value of the cash.
Juniper Networks shares are down almost 4% following the announcement of the management change, but analysts see the change as positive. The stock is down 9% YTD and a lot of negative overhang from the Street. If Mr. Rahim can restore investor confidence in Juniper that has eroded for many years, and provide leadership to establish even very moderate growth while just maintaining margins, shareholders could be rewarded. Success in margin improvement or achieving a growth rate in the low-to-mid single digits would provide further upside. The low expectations among investors for Juniper create a good risk/reward case to own the share