Citigroup analyst: Juniper stock jumps could give hedgers opportunity

By Ronda Fears

Nashville, Jan. 21 - Juniper Networks has been on a tear and sparked a sector-wide run in networking companies. Although the group pulled back some Wednesday, convertible analysts like Juniper. In fact, jumps in the stock valuation could provide opportunity for hedged investors.

Lynn S. Hambright, convertible analyst at Citigroup Global Markets Inc., said the focus is on Juniper's 0% convertible due 2008, which is trading around 162, since the company's 4.75% convertible due 2007 is trading on top of the call price and is expected to be retired soon.

"It is our opinion that further stock gaps are more likely than not and as such, provide opportunity for the hedged investor," Hambright said.

"Given the run in the shares, we recommend hedge clients be delta neutral; should credit trade tighter than T+140, we would look to increase the hedge once the shares settle down. We would be open for a heavier hedge at some point but we admit speculating about investor speculation is difficult - and this space is on fire.

"In any case, speculation for this name abounds, and we would suggest that this type of scenario creates a good environment for gaps in the share price."

Juniper is a solid credit with a high cash balance of nearly $1 billion, coupled with profitability and positive cash flow from operations, Hambright explained.

At a price of 162, the 0% convertible "prices in continued good execution," the analyst said, modeling the security with a stock volatility of 45%, which gives an implied credit spread of 140 basis points over Treasuries.

"We realize spreads have narrowed across the board and as such, we find ourselves more conservative than the market; we prefer T+200. We view ourselves as positive on the company and fundamentals but trying to be realistic about the trajectory of improvement," Hambright said in a research note.

"We think this company, and its prospects, are viewed favorably so it is possible that Juniper credit could hold given a pull back in the shares. In any case, appreciation from a 'more right' credit spread isn't as great, given the bond's high delta of 85.2%."

Credit investors should realize that Juniper posted $206 million in revenue last quarter and may be prone to swings in revenue due to lumpiness in orders and speculation by momentum investors.

Yet, she said, the company seems well positioned going forward, "so we do not expect to be spooked, on the credit side, should we see revenues less than expectations, assuming we didn't get carried away with the credit spread."

Hambright noted equity valuation metrics for Juniper range from a price-to-sales multiple of 13.5 times to a price-to-earnings ratio of 46 times.

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