Daniel Grizelj
There are some industries that have oligopolies, like UPS (UPS) and FedEx (FDX), in which both companies are formidable players with sizeable market share. There are other industries that are led by one dominant company followed by a “second banana” of sorts.
That was the case for many years with Intel (INTC) and Advanced Micro Devices (AMD), with the latter having been written off by the investment community for many, many years before AMD began to shine a few years ago.
This brings me to the networking industry, which is led by Cisco (CSCO), a dominant force in the market, and Juniper Networks (NYSE:JNPR) which has played second fiddle for many years. While I don’t see JNPR disrupting networking what AMD did for semiconductors anytime soon, I do believe it offers compelling value at present for dividend growth investors, so let’s get started.
Why JNPR?
Juniper Networks is a global networking products and services company that connects the way people work and live. It offers a high-performance network infrastructure that creates opportunities for service providers, enterprises, and governments worldwide. The company operates in Service Provider Routing, Enterprise Routing and Security, and Development and Services, and in the trailing 12 months, generated $4.9 billion in total revenue.
Unlike Cisco, which posted flat YoY revenue growth in its latest reported quarter (Q3 FY22), Juniper is growing nicely, with 8% YoY revenue growth to $1.27 billion in the second quarter. This was driven by healthy demand signals, as the company continues to attract customers in its enterprise, cloud, and service provider markets with backlog orders sitting at a record level.
This sets up Juniper for a strong revenue outlook as it works its way through customer orders, and this is reflected by the 6.3% sequential revenue growth to $1.35 billion that management has guided for in Q3. Also encouraging, Juniper is seeing higher profitability, with operating margin growing by 120 basis points on a YoY basis to 8.5%.
The future for Juniper looks bright, as it has the scale to capitalize on the megatrend of helping customers transition to a secure and automated multi-cloud and AI-driven environments, as well as the global transition to 5G.
This is reflected by its strong momentum in the service provider segment, with a recently secured 400 gig core win with one of the Tier 1 U.S. carriers. Moreover, Juniper is also making progress in large metropolitan markets where it recently introduced several new platforms to further its competitive position there. Management also highlighted its cloud/AI momentum during the recent conference call:
Customer interest in our cloud-ready data center portfolio remains high and given the wins we’ve already secured, I am optimistic about our ability to capitalize on the attractive growth within this market over the next several years. Our AI-driven enterprise revenue continued to materially outpace the market, growing 17% year-over-year. This strength was led by our Mist-ified portfolio, which grew more than 60% year-over-year, achieving another record quarter for both Mist Wi-Fi and Mist-ified revenue.
We are especially encouraged by the traction we’re seeing with large customers across the globe with wins at a global financial bank, a global car manufacturer, and a global furniture retailer, each of which recently purchased a combination of AI-driven wireless, wired, security and/or SD WAN products from Juniper.
To build on this AI-driven enterprise momentum we continue to deliver groundbreaking new products that optimize both end user and operator experiences such as a recently launched EX4100 family of access switches. Like the EX4400 family announced last year, these are truly enterprise grade access switches born in the cloud with native AIOps ensuring easy setup and management coupled with best-in-class scalability, security and performance.
Meanwhile, Juniper maintains a solid BBB rated balance sheet. It also pays a well covered 3% dividend yield with a 47% payout ratio. Juniper has also been an impressive dividend grower with a 5-year dividend CAGR of 15.4%.
At the current price of $28.11, the stock trades at a reasonable forward PE of 15.2. This appears to be attractive considering its tailwinds and the expectation of 12-20% annual EPS growth over the next 2 years by analysts. Sell side analysts have an average price target of $33.28, and this translates to a potential one-year 18% total return including dividends.
Investor Takeaway
Juniper Networks is benefiting from strong tailwinds in the form of the transition to 5G, cloud computing, and AI. It’s demonstrating healthy revenue growth and this is expected to continue as it works its way through the record backlog. It also has a solid balance sheet and pays a well-covered and growing dividend. Juniper appears to be attractive at present for dividend growth investors for potentially strong long-term returns.
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