Citi: Buy Large-Cap Networking Giant Cisco, Sell F5 (And Hold Juniper)

In a report published Tuesday, Jim Suva of Citi initiated coverage of Cisco System, F5 Networks and Juniper Networks.

According to Suva, all three companies "play in mature markets" and are undergoing (or have already undergone) "significant" market, technology and management transitions. The analyst added that these three large cap networking companies are likely to be "rewarded" for: 1) a predictable and sustainable growth profile, 2) their ability to protect (and potentially grow) gross and operating margins and 3) meeting investor expectations.

"We prefer companies actively transitioning from point-product hardware sales to a software selling motion and to recurring revenue models," Suva wrote. "We believe both Cisco and F5 are rapidly adjusting their product offerings and go-to-market models to embrace software/ licensing, but see limited impetus for Juniper to go down that path based on their primary strength in routing and large concentration of carrier customers.

Cisco Initiated At Buy

Suva initiated coverage of Cisco with a Buy rating and $30 price target, as the company will benefit from a higher-than-expected margin profile following its transition to software/recurring revenue models and the divestiture of connected devices.

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Suva also noted that consensus estimate for Cisco's sales, margins and earnings per share are "too low," likely to result in a "modest" increase in its stock valuation coupled with "fundamentally higher" earnings and cash flow generation.

Juniper Initiated At Neutral

Suva initiated coverage of Juniper with a Neutral rating and $29 price target, as the stock is currently "fairly valued."

Suva added that consensus estimates are "realistic" and "likely to be met" with no expectations for a material beat or miss.

F5 Initiated At Sell

Suva initiated coverage of F5 Networks with a Sell rating and $105 price target, as the company is expected to guide its outlook lower within the next six months.

Suva stated that his Sell rating is the only one on the street and is due to his belief that consensus estimates are too high. The analyst added that while new appliances will lead to an upgrade cycle, this represents a fiscal 2017 event, as it takes months for customers to test new appliances before deploying them.