While F5 remains a good company, investors can do better by looking to HP and Cisco.
NEW YORK (TheStreet) -- Enterprise service giant F5 Networks(:FFIV), a company that I continue to consider grossly expensive by many standards, will be reporting earnings on Wednesday after market close.
I think it would be wise for investors to consider selling portions of their holdings and instead look to acquire much cheaper names such as Cisco(:CSCO) and Hewlett-Packard(:HPQ).
Although F5's pricey valuation continues to be an issue for value investors, the company continues to do its best to avert those concerns by a recent string of performances. Will it continue?
In its scheduled report on Wednesday, analysts are expecting earnings per share to arrive at $1.14 on revenue of $353 million. To its credit, the company has either met or beaten estimates in each of the past four quarters.
In fact, in its most recent quarter, the company reported revenue of $339.6 million -- representing an increase of over 22% on an annual basis and 5.3% sequentially after having $322.4 million in the prior quarter, while also earning $68.6 million in net income, or 86 cents per diluted share.
Though the company continues to demonstrate solid performance, it is hard to fall in love with a stock that trades at such a high P/E of 27 that competes within the same sector as the market leader in Cisco that trades at 12, or less than half F5's multiple.
For that matter, an argument can also be made for Hewlett-Packard which is currently trading at a P/E of 7, or essentially one-fourth of F5.
I will concede that Cisco has indeed made more than its shares of mistakes -- some of which have allowed newcomers like F5 and Riverbed Technology(:RVBD) to encroach on its territory and steal some market share.
But this is a different time, and the company has now logged four consecutive earnings beats. Cisco's recent report generated earnings of 48 cents per share -- topping analysts' estimates of 47 cents. This number represented an increase of 14% from the 42 cents it earned in previous year.
The company reported net income of $2.2 billion or 40 cents per share on revenue of $11.6 billion -- topping net income of $1.8 billion or 33 cents per share for the same period last year. According to estimates, analysts had expected $11.58 billion in revenue. The major concerns for Cisco have always been its ability to execute effectively in the face of economic weakness. But that was clearly not the case.
When comparing the two companies, Cisco still owns over 60% share in the all-important switching business and over 50% in routing. There isn't another competitor that comes close. Granted it is clear that from the earnings report that those businesses are no longer growing as investors would like but, as I have said recently, this area of Cisco's business is just about to heat up as a recent study suggests that bandwidth for increased data will soon come at a premium and there will be no other company better positioned to capitalize on that growth than Cisco. Bottom Line
F5 is certainly a good company and it is clearly executing in a manner that suggests that the market just might be right to have priced it so highly. However, from the standpoint of value and the fact that the company at one point had already climbed 23% on the year, I can't ignore the reality that investors just might have already missed the boat.
What's more, as competitors such as Cisco and Hewlett-Packard continue to rebound from a disappointing 2011, I would think that this will only add increasing pressure to F5 to continue to perform. I think the company understands this by having issued third-quarter guidance that arrived slightly below pre-existing estimates. So is there a possible surprise in works?
As enamored as I have now become with its performance, I still can't justify choosing F5 over value plays such as Cisco and HP -- although not as dynamic, they do offer some safety while providing decent dividends yields.
At the time of publication, the author held no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.