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Watch These Four Network Suppliers as Economic Uncertainty Rises


Telecom companies have rebounded with job reports. Is it time to be bullish again?

The release of economic figures may sometimes move sectors or markets. Back in April 2013, weak non-farm payroll numbers (or NFP) hurt stocks in sectors considered to be leading indicators. Telecom network suppliers were hurt when March NFP numbers missed consensus estimates by a long shot. At the time, NFP was 88,000, compared to a consensus of 190,000. F5 Networks, Inc. (NASDAQ:FFIV) also warned that its March quarter would be weak. This led to a major sell-off. Since then, companies in the telecom sector rebounded. In May 2013, NFP was 175,000 compared to estimates of a payroll of 163,000.

Does this suggest investors should be getting bullish on telecom equipment makers?

Monthly Returns

Below are the monthly returns of JDS Uniphase Corp (NASDAQ:JDSU), Informatica Corporation (NASDAQ:INFA), Mellanox Technologies, Ltd. (NASDAQ:MLNX), and F5 Networks:

Valuation Matters More

The forward P/E of telecom equipment makers rose from late 2012. Only the valuation in F5 Networks declined in the last two years:

JDS Uniphase is cautious about its current quarter. The company operates in the core network business of optical communications components. The other part of its business is laser components, which comprises of 40% to 45% of total revenue each quarter. A weaker macro environment could pressure margins, but JDS has new products like Arieso, StrataSync, and PacketPortal (to name a few) to help the company possibly reach gross margins in the high 60%.

F5 Networks reported a weak second quarter in April 2013, due to a slowdown in orders in North America. The emerging markets also contributed to the weakness. Weakness was especially significant in F5's telecommunications vertical. Sales dropped and were hurt by project delays related to funding. The government sequester also hurt the quarter. Looking ahead, investors could anticipate that by the fourth quarter (September), government spending will pick up. That quarter is seasonally strong for government spending.

The network infrastructure software is a $170 billion industry, and $9 billion of the market is addressable today. Data integration and data quality in embedded applications and devices will be growing in importance for Informatica. Even though short-term fluctuations in the economy could be a challenge for the company, Informatica said that it is positioning itself for growth regardless. MDM, or master data management, will be an area of development for Informatica.

Shares of Mellanox are stuck in a range at around $45-$60. The company is a fabless semiconductor company that sells interconnect products. This facilitates data transmission between servers, systems, and storage. Its high forward P/E is supported by revenue growth of 43% over the last five years (CAGR). Shares remain low because in Q4, Mellanox generated revenue of $122 million, which was below the $145 million - $150 million target. It will take several quarters before inventory is depleted.

Editor's note: This story by Chris Lau originally appeared on Kapitall.

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