Juniper Networks (NYSE: JNPR) Stock Jumped 9% – But Trouble Ahead

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Juniper Networks (NYSE: JNPR) stock jumped as much as 9% Friday following news another activist shareholder has taken a sizable stake in the networking gear company.

Sep 19
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Price: 22.63 | Ch: -0.16 (-0.7%)

Hedge fund Jana Partners, which built a significant position in Juniper in Q4 to become one of the company's largest shareholders, is lobbying for some big changes. Jana believes Juniper should trim roughly $300 million in costs annually and return a portion of its capital to shareholders.

Jana has been in touch with Juniper's management regarding its proposals. The hedge fund continues to voice concerns over executive compensation and money spent on its Sunnyvale, Calif. headquarters. Jana maintains Juniper's board "would benefit from the addition of new directors with a fresh perspective."

Juniper's new Chief Executive Officer Shaygan Kheradpir, who just took the helm on Jan. 1 with the aim of making some positive changes, addressed the activist's concerns Thursday on the company's quarterly earnings call.

Kheradpir vowed to conduct a review of the company's costs and explore ways to reward investors via share repurchases and dividends.

Jana' sentiment is similar to those made public last week by Elliott Management Corp., which has a 6.2% stake in Juniper.

Elliott is pushing Juniper to slash costs by $200 million, slightly less than what Jana is proposing. In addition, Elliott is vying for a $3.5 billion share repurchase program and a strategic review of some Juniper business lines.

Elliott believes such moves could buoy Juniper stock as high as $40, from the $27 where it's trading today.

But, before you jump on JNPR shares, read on...

Juniper (NYSE: JNPR) Stock Isn't a Sure Thing

While Juniper reported Q4 earnings that beat last year's, and were ahead of estimates, Juniper's guidance for Q1 of 2014 was modestly lower. In other words, disappointing.

Following the earnings report and news of Jana's stake, Wedbush Securities analyst Rohit Chopra reiterated a "Neutral" rating on shares.

Here's what he wrote to clients:

"Despite a good finish to the year and some stabilization in the business, challenges remain as evidenced by a mixed guide and some degradation in margins."

He expects Juniper's management to react to activist shareholders' suggestions with a restructuring plan that's likely to include "some form of cost rationalization and a capital return strategy which could include a dividend."

A dividend and share buyback program would indeed be welcome and would probably provide a near-term boost. But gains could be temporary and merely a distraction from a bigger problem: competition.

Muscling in on Juniper's territory are companies such as industry giants Cisco Systems Inc. (Nasdaq: CSCO) and AT&T (NYSE:T), and smaller rivals like F5 Networks (Nasdaq: FFIV).

While demand for Juniper's routers and switches is growing as telecommunications carriers navigate the explosive traffic from mobile devices, Juniper's growth is tempered because customers continue to seek out less expensive technologies to deal with the increased load.

According to Bloomberg, Juniper's revenue growth is forecast to dwindle to 5% in 2014, down from 7% last year.

Juniper (NYSE: JNPR) stock closed up 6.57% at $27.72.

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