Investors want too much from F5 Networks

It's unreasonable to expect the company to meet the current demands.

By Jim J. Jubak Jan 23, 2012 3:01PM
A great earnings report from F5 Networks (FFIV) after the close on Jan. 18 has taken the stock within hailing distance of my June target price of $124.

The stock was trading at $120.30 at midday Monday.

I'm selling F5 Networks out of my Jubak’s Picks portfolio. Not because of anything wrong with the earnings report -- it was great -- but on rising expectations among investors. I think F5 Networks has hit the point that many momentum plays hit where investors start hoping for more -- and pricing in more -- than it's reasonable to expect the company to deliver.

I have a 56.6% gain on these shares since I added them to this portfolio on Sept. 28, 2011.

For the first quarter of fiscal 2012, F5 Networks reported earnings of $1.03 a share. That was 2 cents a share better than the Wall Street consensus. Revenue climbed by almost 20% from the first quarter of fiscal 2011 to $322.4 million. That was slightly above the consensus expectation of $319.06 million. For the second quarter of fiscal 2012, the company raised its guidance to earnings of $1.05 to $1.07 a share. The current Wall Street earnings estimate calls for $1.05 a share.

Absolutely nothing wrong with these numbers, especially in the seasonally weak first quarter -- except that they mark a real decline in the momentum for this stock. For the just-reported quarter, F5 Networks beat the Wall Street earnings consensus by 2.5%. That’s down from the 9.1% positive surprise in the September 2011 quarter and the 8.5% positive surprise in the June 2011 quarter.

Wall Street analysts seem to be shaking off any worry that they might have about that pattern by saying that the first quarter of fiscal 2012 marks an inflection point in the company’s growth. Next quarter will mark an acceleration in growth as revenue from new products such as the Viprion 2400 and the new Virtual Clustered Multiprocessing module kicks in, many Wall Street reports say. The company cited that product pipeline in its guidance for 20% revenue growth year-to-year in 2012.

It's the price that investors have put on that growth thesis that bothers me and leads me to say, "Take profits now because the risk outweighs the reward." At the Jan. 19 close, the shares trade at 38.7 times trailing 12-month earnings per share. That drops to a forward price-to-earnings ratio of 33.6 on projected earnings. But that’s rather pricey for a stock that the Wall Street consensus sees growing earnings by just 20.5% in fiscal 2012.

That kind of growth priced at that kind of PE in this kind of volatile market is just a risk profile that I don’t like very much right now. I'll take my profits now, thank you.


At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. 
The fund did own shares of F5 Networks as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Tags: FFIV
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