Bull of the Day: Ruckus Wireless (RKUS)

Ruckus guided below the consensus due to lengthening sales cycles in Asia and FX headwinds.

Then as the dust settled, analysts actually raised EPS estimates, taking this year from $0.13 to $0.16 (GAAP basis) and next year from $0.26 to $0.30.

Both the agreement among analysts and the magnitude (on a percentage basis) of their upward earnings estimate revisions caused the Zacks Rank to rise to the top tier.

What's the Ruckus All About?

Ruckus Wireless is a pioneer in the wireless infrastructure market, enabling carriers and enterprises to stay ahead of the exploding demand for high-bandwidth applications and services. It provides routers, adapters, and wireless access gateways, as well as managed wireless local area network, backhaul, and triple-play carrier services.

Ruckus serves enterprise customers in various industries, including hospitality, education, healthcare, warehousing and logistics, corporate enterprise, retail, state and local government, and public venues, as well as to mobile operators, cable companies, wholesale operators, and fixed-line carriers.

Their unique enterprise solutions, which include innovative new products like Cloudpath, Xclaim, and Unleashed, are gaining traction in the industry. And this is helping Ruckus to build partnerships with other established communications technology players like Juniper JNPR and Brocade.

One of the bigger tailwinds for Ruckus has been the federal E-Rate program, the commonly used name for the Schools and Libraries Program of the Universal Service Fund, which is administered under the direction of the Federal Communications Commission (FCC).

The program provides discounts to assist schools and libraries in the United States to obtain affordable telecommunications and Internet access. It is one of four support programs funded through a Universal Service fee charged to companies that provide interstate and/or international telecommunications services.

Head of the Class

Part of the Ruckus marketing philosophy claims that "Smarter Wi-Fi is no longer negotiable in delivering a 21st century education."

But there has been concern among analysts and investors about the "lumpiness" in E-Rate spending that is hitting the RKUS income statement. Here's what Oppenheimer analysts had to say recently...

"Nothing has been smooth or predictable about the E-Rate approval process and the timing of spend. A large portion of the current FY program has yet to be spent (likely back-end loaded into 2Q16), but with the 2016/17 program ($2.5-4.0 billion) around the corner, YoY spending is expected to rise, especially with Ruckus more focused and prepared for the opportunity."

And it does sound like Ruckus is executing on its strategic plans and opportunities quite well. In July, research firm Infonetics published their 2015 Carrier Wi-Fi Scorecard. Ruckus was chosen as the top solutions provider, even ahead of Cisco CSCO. Here's how the players were matched up...

"There are a limited number of vendors around the globe that make and sell carrier WiFi equipment. The 5 vendors profiled in this Scorecard —- Ruckus Wireless, Cisco, Ericsson, Huawei, and Alcatel-Lucent —- were selected because they are the top revenue producers for carrier WiFi equipment. The purpose of this Scorecard is to analyze the relative strengths among these vendors."

Conviction Buy List

On November 9, Goldman Sachs upgraded Ruckus Wireless from Buy to Conviction Buy with a price target of $16. Analyst Doug Clark said he would use its post-earnings pullback as an opportunity to build or add to positions...

"Shares are down 14% since a 3Q earnings beat and 4Q guidance bracketed consensus at the high end of its range. Thematically, Ruckus offers direct exposure to the high-growth WiFi market (as the largest remaining pure-play vendor). We also see multiple sources of optionality that could drive upside to both consensus estimate and multiple expansion.

"Post 3Q earnings, our positive fundamental view on Ruckus' competitive landscape and the improving outlook for WiFi end-market growth remains unchanged. Incrementally, we analyze several sources of upside optionality that could drive outperformance: 1) entering the controller-less WiFi market, 2) a pick-up in Service Provider WiFi engagement, particularly at Comcast CMCSA and Charter Communications CHTR, 3) retaining a leadership position in the Wave 2 technology cycle, 4) partnerships with Juniper and Brocade, and 5) further E-rate funding allocations.

"Our analysis suggests that controller-less product launches have driven an average 1% market share gain for WiFi vendors. Among service providers, Comcast announced its intent to establish an MVNO network and Charter plans to embrace WiFi post M&A, which could present large customer opportunities. Operating margin expectations also appear conservative, coming below company guidance for 4Q16."

Whales On Board

The third quarter of 2015 saw overwhelming appetite for Ruckus shares from institutional investors. This is a driving force of markets I track on a daily basis and it formed one of the buying criteria I used to add RKUS shares last week to the Follow the Money (FTM) Trader portfolio. Here's how the buying demand among the "whales" of the stock market stacked up...

Q3 2015 Top 15 Buyers (data and image courtesy of Nasdaq.com)

It's unusual to see this many large fish in such a small-cap pond. But I'm betting they are right about the future of Ruckus.

Disclosure: I own shares of RKUS for the Zacks FTM Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money (FTM) portfolio.
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RUCKUS WIRELESS RKUS: Free Stock Analysis Report
 
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