F5 Networks (FFIV) in HOLT

Relative Wealth Chart & Whats Priced In: FFIV dramatically improved its
CFROI profile over the past decade while also growing its asset base at a high rate.
Nonetheless, the market is skeptical of FFIV going forward as its price embeds
margins to decrease 800bps from forecast levels with long-term sales growth of 6%.
Market & Analyst Sentim ent: While expectations may appear low, price
performance has been poor (down 45%+ the last year) and CFROI revisions
continue to fall, which may weigh on the shares in the near-term.

Relative Valuation: Compared to Communication Equipment peers, FFIV is priced

for one of the steepest declines in near-term forecasts.
Risk/ Reward Profile: Assuming FFIV can achieve long-term sales growth of 9%
with margins in-line with forecasts, upside of 40% is warranted. In a 20% downside
scenario, long-term sales growth of 3% with materially lower margins are required. In
sum, risk/reward appears attractive if 9%+ growth can be sustained longer term.
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HOLT

Relative Wealth Chart: FFIV dramatically improved its CFROI profile over the
past decade while also growing its asset base at a high rate; Nonetheless, the
market is skeptical FFIV can sustain these improvements going forward.
Relative Wealth Chart

Historical CFROIs

Forecast CFROIs Market-Im plied CFROI

Valuation
Price USD

72.77

upside

Warranted Price

129.36

+78%

Econom ic PE Ratio

5 year observed range

Current 14.0
Regional Industry 14.9

Low
10.8

Median
22.5

High
41.8
Communications Equipment, US-Americas

Dividend Yield

0.0%

Risk
Probability of Default

0%

Average Credit Rating

NA

Accounting Quality

Good

Mom entum

CLARITY IS CONFIDENCE

6m

3m

1m

CFROI Revisions

-2.60

-1.71

-1.83

Price Change %

-29.22

-24.94

-22.13

HOLTs default warranted valuation presented above

2

HOLT

Market & Analyst Sentim ent: While expectations may appear low, price
performance has been poor and CFROI revisions continue to fall, which may weigh
on the shares in the near-term.
Price Mom entum

Weekly Price (18 Month)

18 mth

1 yr

6 mth

1 mth

1 wk

Absolute

-13.88

-46.14

-29.22

-22.13

-17.82

Rel. To Peers

-29.90

-46.66

-40.11

-18.15

-13.90

Communications Equipment, US-Americas

CFROI Revisions (18 Month)

1 Month CFROI Revisions

3 Month CFROI Revisions

CFROI Revisions
6 mth

3 mth

1 mth

1 wk

CFROI Revisions

-2.60

-1.71

-1.83

-1.83

As % of CFROI

-10.96

-7.20

-7.73

-7.73

0.23

0.27

0.05

-0.03

Average of Peers

Communications Equipment, US-Americas

Note: CFROI Revisions measures the impact on CFROI forecasts from a change in consensus estimates.

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HOLT

Whats Em bedded in the Current Price?: Assuming a 5-year valuation window,

FFIV is priced for margins to decrease 800bps from forecast levels (to 32%) along
with long-term sales growth of 6%.

IBES consensus estimates

used for 2013/2014

6%

32%

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HOLT

Peer Relative Valuation: Compared to Comm Equipment peers, FFIV is priced for
one of the steepest declines in near-term forecasts.
5-yr CFROI Median

CFROI %

30

LFY CFROI

CFROI Forecast

Market Im plied CFROI

24
18

12
6
0
HTC

Asset Growth %

35

FFIV

AAC

5-yr Median Asset Growth

QCOM

BBRY

CSCO

LFY Asset Growth

HRS

ERICB

JNPR

Forecast Asset Growth

ZTE

MSI

NOK1V

Market Im plied Asset Growth

25
15
5
-5
FFIV

AAC

QCOM

BBRY

CSCO

HRS

CFROI Revisions (3 Month)

1.5

ERICB

JNPR

ZTE

MSI

NOK1V

Relative Price Return (3 Month)

40

1.0

20

0.5
0.0

-0.5

-20

-1.0
-1.5

Price Return (%)

CFROI Revisions (bps)

HTC

-40
HTC

FFIV

AAC

QCOM

BBRY

CSCO

HRS

ERICB

JNPR

Note: Communication industry greater than $5b presented above. Sorted by the spread between forecast CFROI and market-implied CFROI.

CLARITY IS CONFIDENCE

ZTE

MSI

NOK1V

HOLT

Risk/ Reward Profile: Assuming 9%+ sales growth can be sustained along with
margins in-line with forecasts, 40%+ upside appears warranted.
FFIV Bear Case (20% Downside)

FFIV Bull Case (40% Upside)

Valuation Matrix (Risk/ Reward Profile)

After warning on its Q2 results last week, FFIV has
dropped over 20%. Assum ing FFIV can achieve
long-term sales growth of 9% with m argins in -line
with forecasts, upside of 40% is warranted. In a 20%
downside scenario, long-term sales growth of 3%
with 29% m argins are required. In sum , risk/ reward
appears attractive if FFIV can sustain high single digit / low double-digit growth longer term .

2017 EBITDA
Margins

2017 Sales Growth

23.0%
26.0%
29.0%
32.0%
35.0%
38.0%
41.0%

-3.0%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

$39.3

$44.0

$50.0

$57.7

$67.6

$80.3

$96.8

$42.2

$47.5

$54.3

$62.9

$73.9

$88.2

$106.6

$45.1

$51.0

$58.5

$68.0

$80.2

$96.0

$116.3

$48.0

$54.5

$62.7

$73.1

$86.5

$103.8

$126.1

$50.9

$58.0

$66.9

$78.3

$92.8

$111.6

$135.8

$53.8

$61.4

$71.1

$83.4

$99.1

$119.4

$145.5

$56.7

$64.9

$75.3

$88.5

$105.4

$127.1

$155.1

Downside scenario assumptions

CLARITY IS CONFIDENCE

Upside scenario assumptions

HOLT

Appendix

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HOLT

HOLTs Price Tracking Chart: Historically, HOLTs default warranted valuation has
tracked FFIVs price fairly closely (1% historical deviation).

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HOLT

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The HOLT methodology does not assign ratings or a target price to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the
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