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Downgrades Flow From LaFountain

Needham & Co. downgrades Cisco and Juniper as stocks climb toward target prices

November 16, 2001

3 Min Read
Downgrades Flow From LaFountain

Needham & Company analyst A.A. (Tad) LaFountain III is sticking to his guns, or his price targets, as the case may be.

In two separate research notes released this morning, LaFountain downgraded Juniper Networks Inc. (Nasdaq: JNPR) to a Buy from a Strong Buy, and he downgraded Cisco Systems Inc. (Nasdaq: CSCO) to a Hold from a Buy rating.

In afternoon trading today Juniper rose 0.11 (0.44%) to 25.23. Cisco sank 0.33 (1.64%) to 19.81.

Most analysts in the industry already had Cisco rated as a Buy. By contrast, Juniper’s ratings stretch the gamut from a Strong Buy (Paul Johnson of Robertson Stephens) to a Hold (Nikos Theodosopoulos of UBS Warburg).

LaFountain says that his reason for downgrading these stocks is simple. While neither company experienced fundamental change in its business, Juniper's stock price was reaching his target too quickly, and Cisco had already surpassed his target.

"On the first day of business school, I paid attention to that whole 'buy low, sell high' thing,” LaFountain spouts.

In the case of Juniper, the stock was trading at $25.12 when the note was issued today. LaFountain has the price target set for $29 a share. But since he raised the rating on the stock on November 5, when the stock was at $19.48, the share price has increased 29 percent.

“The potential gain to our target has dropped to 14 percent, below the 20 percent necessary to justify the Strong Buy rating,” he writes in his note. “Consequently, we are downgrading our rating from Strong Buy to Buy.”

In Cisco’s case, the stock was trading at $20.14 when the note was issued, with a price target of $16. Its shares have increased from $12.04 (67 percent) since LaFountain upgraded it on September 24. He had downgraded it to a Buy on October 12, 2001, when it was trading at $16.95. In essence, it has gone up 20 percent above his target, which he says forces him to downgrade the stock.

Overall, LaFountain believes that the long-term outlook for both companies is positive, but he sees some short-term strains on Juniper. He notes the loss of marketshare that Juniper experienced this quarter to Cisco. According to a recent study published by market research firm Dell'Oro Group, Cisco increased its share to 65 percent in Q3 from 60 percent in Q2. As a result, Juniper’s marketshare dropped to 32 percent in Q3 from 35 percent in Q2. In his note, LaFountain explains that Juniper is suffering the short-term effects of a down product cycle. He says that customers looking to upgrade their networks are awaiting follow-on products to Juniper’s M40 and M160 core routers. Cisco, on the other hand, is just beginning to roll out its latest generation of GSR 12000 routers, which has put pressure on Juniper sales.

“We believe these market share trends are somewhat transient in nature,” he writes, “and do not view them as significant in terms of our long-term growth and valuation metrics.”

At midday, Juniper was up 0.17 (0.68%) to 25.29, and Cisco was down 0.25 (1.24%) to 19.89.

— Marguerite Reardon, Senior Editor, Light Reading

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