Argus Starts Arista Networks At Buy, Says Outlook Is Strong
Argus launched coverage on Arista Networks Inc (NYSE: ANET) with a Buy rating and target price of $107 as it believes the company is a key beneficiary of multiyear shift to cloud networking from legacy IT silos in the coming years.
However, the company recently found to have infringed on Ethernet switch patents held by Cisco Systems, Inc. (NASDAQ: CSCO) and is now prohibited from importing products and supplies related to this business.
“Although we believe that ANET warrants a below-peer-average multiple based on the patent infringement issue and other near-term challenges, the current discount appears excessive given our forecast for above-average growth (18% for ANET versus 15% for peers),” analyst Jim Kelleher wrote in a note.
Arista’s shares are trading at a PEG ratio of 1.2, well below the average of 2.2 for peer communications equipment companies.
Kelleher pointed out that over the past two years, Arista delivered compound annual revenue growth of 52.3 percent, and EPS growth of 84.1 percent, suggesting strong demand for cloud networking solutions.
The analyst set a 2016 adjusted EPS forecast of $3.10, up 27 percent from $2.44 in 2015, on a 33.5 percent rise in sales. For 2017, Kelleher forecast another 19.4 percent rise in EPS to $3.70, on a 22 percent gain in sales.
However, the analyst expects margins to narrow beginning in the fourth quarter, as the company begins to use a domestic manufacturing facility and supply chain following the patent infringement ruling.
“We see similar sales trends and continued margin pressure in 2017,” Kelleher noted.
The $107 target implies a PEG ratio of 1.6, still well below the peer average, and a potential return of 27 percent from current levels.
Latest Ratings for ANET
Oct 2016 | Argus Research | Initiates Coverage On | Buy | |
Sep 2016 | MKM Partners | Downgrades | Buy | Neutral |
Sep 2016 | Deutsche Bank | Maintains | Buy |
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