3 network stocks to buy now
It's time for investors to start positioning for a prolonged recovery in the network sector.
By Richard Saintvilus
Now that concerns related to the fiscal cliff have subsided, investors can get back to the business of risk.
Obviously, some stocks are better than others. But with corporate earnings set to rise in 2013, here are a few enterprise stocks that are poised to capitalize on increased spending.
At the top of the list is Cisco. The company started its fiscal 2013 just as it ended 2012, with another earnings beat. The network giant reported net income of $2.6 billion, or 48 cents per share, on revenue of $11.9 billion.
Not only was this enough to beat analysts' estimates of 46 cents per share, but the results also represented 11% profit growth. Likewise, revenue grew by 6% -- exceeding Street expectations of $11.77 billion.
Cisco continues to see excellent improvement in its services business with revenue growing year-over-year by 12%. Some of the company's largest customers have contributed to the growing demand as evident by the 9% increase in orders. But that was not the case for the company's core routing and switching business which continues to underperform. The company has responded by opening its wallet.
The company's recent shopping spree includes spending $1.2 billion for Meraki and most recently $141 million in cash for Cariden. In all, Cisco completed nine cloud-based acquisitions last year.
The company is using these deals to leverage its strong services business, which grew last year by 12%. That Cisco has been investing heavily in this direction is not a surprise, particularly since that market is projected to grow to $177 billion by 2015.
In the meantime, the company is looking for any type of competitive advantage. The company is willing to leave no stone unturned to find growth opportunities -- regardless of how much it cost. Investors would be wise to add shares at current levels as the stock has a good opportunity to trade in the $25 to $30 range during the course of the next 12 months.
- Also see: Big banks: fiscal cliff winners
Another stock investors should keep an eye on is Brocade. Despite gaining just above 2% last year, there is a lot to like with the company's business. Although Brocade has performed quite well this year, the market seems to show no interest in discussing the company's prospects unless it involves M&A speculation. Also, it seems the company's strong fourth-quarter performance has only served to fuel that fire.
Brocade ended the year on a strong note. Fourth-quarter revenue grew 4% sequentially and improved 5% year-over-year to $578.3 million, easily beating the consensus estimate of $566 million. This is certainly encouraging, particularly for how tech stocks have disappointed investors due to a poor macro environment that has hurt enterprise spending.
The company was helped by better than expected performance in product revenue, which improved 7% year-over-year and 5% sequentially. Likewise, profitability was impressive. The company reported GAAP net income of $54 million. This compares to a loss of $4 million in the year ago quarter as operating income also grew 12% year-over-year.
Management has consistently shown its main objectives (among other things) include broadening the company and lessening its dependency on its storage business. Clearly, earnings showed the strategy has been working perfectly. But the company continues to be underestimated.
As enterprise spending continues to recover, Brocade will begin to see its stock price appreciate. I would be a buyer here at current levels and investors should expect shares to reach $8 by the second half of the year.
Aruba Networks (ARUN)
Of the group so far, Aruba Networks was 2012's best with gains of 12%. However, at one point the stock was up 35% on the year. Since then, shares have lost 26% of its value. As evident by a solid fourth-quarter report, which ended the year on a high note, investors should anticipate a much better performance from Aruba in 2013.
During the quarter revenue surged 22% year-over-year to $139.2 million. Aside from a 6% sequential improvement, sales topped analysts' estimates of $136.8 million. The company continues to do well in the U.S. as revenue soared 14% sequentially. Aruba earned $22.1 million or 18 cents per share, topping analysts' estimates by 1 cent.
Equally impressive was that gross margins improved year-over-year by three points and arrive one point better sequentially. The company also ended the year with almost $350 million in cash, equivalents as well as other investments. Equally impressive is that it does not have any significant outstanding debt.
With the stock trading just above $21 per share, there is a lot of potential here for a company still growing at 22%. Despite competitive pressures, Aruba's fundamentals are solid and seem poised to continue its growth momentum.
Value investors with some appetite for risk should consider this as an opportunity as part of a long term hold. The stock should see $25 by the second half of the year.
At the time of publication, the author held no position in any of the stocks mentioned.
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3 stocks will be in the spotlight Thursday as investors try to make sense of the numbers from the sector.
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