We would get more constructive on shares on supply chain improvements and a pickup in the wireless business. Conversely, our outlook would worsen on margin deterioration and market share losses in the optical and enterprise businesses.
Our in-depth analysis of Cisco's advanced technologies indicates that the segment as a whole should grow at a compound annual growth rate of 28% through 2008 driven primarily by Home Networking, Wireless and IP Telephony.
While we see limited downside to shares from here, an outlook based on a resumption of growth in the second half of fiscal 2006 raises concerns.
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We recommend adding to positions on weakness as we expect the share gain and profitability improvement thesis to reaccelerate in 2006.
In the near term, we believe Juniper is in the early stages of a transition from a secular to a cyclical growth company, which keeps our rating equal-weight despite an attractive valuation relative to historical multiples. Over the next several years, we think Juniper is well positioned for a spending cycle driven by bandwidth demand, security, and the convergence of services onto IP networks.
We expect the new management team to rationalize the product portfolio and wring out supply chain improvements over time, but we think 2006 is largely a transition year.
We believe the stock should be a core holding for investors.