F5 Networks: Upgraded to Outperform at Credit Suisse Now

In a surprise move, Credit Suisse’s Networking Eq. team is upgrading F5 Networks (NASDAQ:FFIV) to Outperfrom from Neutral with a $134 price target.

Credit Suisse:

Upgrade—Buying Opportunity: We would take advantage of the significant pullback in FFIV’s shares post its announcement of FY1Q11 results and FY2Q11 outlook to accumulate shares. We have raised our rating to Outperform and our TP to $134 and have increased our operating forecasts.

Bottom-line: we see no meaningful change in FFIV’s rev or EPS growth outlook. We still see FFIV driving among industry best-in-class growth in rev, margins and thereby EPS. Our $134TP based on 30x our new CY12 $4.60 EPS forecast, less interest income, adding back net cash, and using a 10% discount factor, amounts to 25% upside. We see primary risk as potential multiple contraction–with approx (14)% downside based upon 25x our new $3.80 CY11 forecast.

Visibility Remains Strong: FY1Q11 revenue was slightly below and EPS essentially in-line and FY2Q11 rev and EPS guidance were essentially inline relative to our and Street consensus’s estimates. FFIV attributed the rev shortfall to a particularly soft last week of Oct and a weaker than expected end of year budget flush. Despite the noted weakness and reporting its first B/B ratio below 1.0 since FY2Q09, FFIV maintained that its deal pipeline is at record levels and the company has strong visibility as to a strong second half of FY11. FFIV attributed the B/B decline primarily to closing fewer large deals in the quarter. FFIV remains leveraged to some of strongest secular growth drivers in all of tech including data center consolidation, mobile data and application growth, cloud computing adoption and storage growth. We see further margin expansion together with ongoing solid growth in F5’s Application Delivery Networking business and the potential for its ARX business to yet post meaningful sustainable growth leading to an upward bias to our operating forecasts.


A Bump in the Road…Not the Beginning of the End
While FFIV failed to live up to the Street’s extremely high expectations for the quarter (by delivering a book-to-bill of <1.0 with “seasonality” issues in the telco/service provider vertical), the company remains the dominant force in a secular growth market (application delivery controllers or ADCs). In fact, despite 40%+ Y/Y growth in CY10, we estimate revenue will grow another 20%+ in CY11 with expanding operating margins (38.4%, up 44bps Q/Q). This combination will likely result in CY11 EPS growth approaching 30% Y/Y. While we downgraded the shares to a Neutral rating at about $112 (October 6, 2010) due to limited return profiles, our CY11 EPS estimate has increased by 16% since then while the stock has actually declined roughly 5%. In our view, this is indicative of the Street once again overreacting to a “bump in the road”. We are upgrading FFIV to a BUY rating with a price target of $130 as we believe the risk/reward profile has once again turned favorable with roughly 20% upside potential in the near-term. Our new price target is based on ~30x our CY11 EPS of $3.71 plus net cash of about $15 per share by the end of year.

Notablecalls: Talk about a surprise move. This one is down 25pts since last night. No downgrades. Also, Gleacher is upgrading FFIV to a Buy.

Bounce? Could this see $115-117 again today? I’m somewhat puzzled about this situation.

It’s a mess but is it really that big of a mess?

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