Motorola Solutions And Arista Networks Could Be Good Bets
Have you considered adding communications equipment stocks to your portfolio? This industry will likely see accelerated growth as a result of fundamental changes that businesses may undergo coming out from the Covid-19 disruption. We expect digital transformation to accelerate and remote collaboration to become more mainstream – thus benefiting this industry as a whole. So who do you bet on among communication equipment companies? We followed a systematic approach and looked at companies that – (1) Have grown at least 30% in the last 3 years indicating market presence and expansion (2) Had more than 20% operating margin in 2019, which suggests strong financial control and pricing power (3) Generated positive cash flow in 2019 (4) Have a cash pile that equals at least 20% of their annual revenue. Thus, we get Motorola Solutions (NYSE: MSI) and Arista Networks (NYSE: ANET). Our dashboard Motorola Solutions & Arista Networks – Two Communication Equipment Bets For A Post-Covid World outlines our methodology and gives more insights to historical performance of these stocks. Overall, they may be good securities to park your money.
Arista Networks – There are three things that intrigue us about Arista Networks. First is its very consistent revenue growth and sharp increase in net income in recent years. The company’s revenues have tripled since 2015 with net income growing seven-fold. The dip in net income in 2018 was a result of one-time litigation expense. Second, as remote collaboration becomes more mainstream, increased data load will require network expansion and upgrades, thus benefiting the likes of Arista. Third, despite consistent improvement in financial metrics, the stock has remained more or less stable for the last 3 years. This could mean a buying opportunity, especially considering how businesses are changing their operations in the post-Covid-19 world.
Motorola Solutions – Unlike Arista, Motorla’s stock has grown consistently, reflecting consistent growth in revenue and profitability. While its margins and cash pile relative to revenue stand lower compared to Arista Network, they are still healthy, sitting above 20%. But here is the key advantage – Motorola Solutions is more than 3 times as big as Arista in terms of revenue. This means much bigger market presence. Therefore, as data explodes, much of the incremental value could be up for grabs for Motorola Solutions.
So that’s a strong duo that certainly warrants a closer look from investors. Even if the Covid-19 catalyst didn’t exist, the trends in financials, coupled with strong liquidity position, may capture investors’ attention. But there is more! Check out this set of 5 stocks – Upside In The Leveraged 5: AAL, CTL, COTY, OXY, HOG? – that could create upside for the brave.
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