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Bear of the Day: Aruba Networks (ARUN)

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Wireless-network equipment maker Aruba Networks, Inc. (ARUN) has taken it on the chin recently. The company delivered disappointing third quarter results and warned of increased competition from its "largest competitor" (i.e., Cisco (CSCO - Free Report) ).

This prompted analysts to revise their estimates significantly lower for both 2013 and 2014, sending the stock to a Zacks Rank #5 (Strong Sell). Despite the big selloff, shares still trade at a significant premium to the industry on a forward P/E basis. Investors should consider avoiding Aruba Networks at least until its earnings momentum turns around.

Aruba Networks is a wireless-network equipment maker. It was founded in 2002 and has a market cap of $1.5 billion.

Earnings Miss

Aruba reported disappointing results for its fiscal 2013 third quarter on May 16. Earnings per share came in at a loss of 9 cents, well below the Zacks Consensus Estimate, which called for a loss of 1 cent.

Revenue climbed 12% to $147.1 million, which was also below the consensus of $152.0 million. Its gross profit margin actually improved slightly to 70.1% of total revenue. However, total operating expenses as a percentage of revenue increased 422 points to 71.8%.

Estimates Plummet

Management lowered its Q4 guidance following the Q3 earnings miss. In the conference call, CEO Dominic Orr warned of a "heightened level of competition and bundling strategy from our largest competitor (Cisco)."

This prompted earnings analysts to revise their estimates significantly lower for Aruba, both for 2013 and 2014. This sent shares to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2013 is now $0.10, down from $0.23 just 30 days ago. And the 2014 consensus has plunged from $0.48 to $0.14 over the same period. You can see this steep drop in the company's 'Price & Consensus' chart:

The Zacks Industry Rank isn't very bullish for Aruba either. The 'Wireless Equipment' industry ranks in the bottom 17% of all industries that Zacks ranks.

Premium Valuation

Although shares of ARUN are down more than -40% since the company's first quarter earnings release, the stock still trades at a premium valuation. Shares currently trade at 49x 12-month forward earnings, well ahead of the industry median of 19x.

The Bottom Line

With increased competition from a major tech giant, negative earnings momentum and premium valuation, investors should consider avoiding Aruba Networks for now.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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