It often pays to go hunting for value in the worst performing sectors of the stock market. Right now, with technology shares out of favour, F5 Networks Inc. looks like a stock that has been unjustly punished and is poised for a snap back.
F5's share price has plummeted 55 per cent from its March, 2012, high of $138.06 (U.S.). In part that reflects the slump that has hit the entire technology sector. The S&P 500 Semiconductor Index has been the worst performing subindex in the S&P 500 over the past six months, losing 11 per cent, while the Technology Hardware Index has sunk 3 per cent.
But F5 stands out as a case where valuation levels appear to understate the company's potential.
The Seattle-based company develops software to increase efficiency in corporate IT networks. Credit Suisse analyst Paul Silverstein believes it is ideally positioned to capitalize on the evolution of network computing. "We see F5 as leveraged to the strongest secular technology growth drivers including data centre consolidation, virtualization, mobile data, cloud computing and security," he writes.
Tal Liani, an analyst at Merrill Lynch, says F5 is trading at a 30-per-cent discount to the forward-looking price-earnings ratio at which it has changed hands in the past, as seen in the chart at left. He predicts that earnings growth is set to accelerate as hardware upgrades are rolled out in 2013. F5 is already benefiting from surging demand for its new network security software: In the most recent quarter, sales of the product jumped 90 per cent from year-earlier levels.
F5 is a favourite of Wall Street and Bay Street analysts. The average target price for all 42 analysts covering the stock is $106, which is 21 per cent above the Wednesday closing price of $88.79. It's one technology stock that deserves a closer look.