Jefferies’ communications equipment analyst William Choi today advised investors to “step to the sidelines” on a number of networking hardware stocks, cautioning that while Q4 results should largely meet expectations, a “prolonged IT budgeting process and weakening purchasing environment” could lead to a subdued outlook for some companies and trigger downward earnings revisions.

Choi downgraded F5 Networks (FFIV), Aruba Networks (ARUN) and Packeteer (PKTR) to Hold ratings from Buy. He maintained a Buy rating on Foundery Networks (FDRY), but cut his target on the stock to $18 from $25. He says the first few weeks of January are off to a slow start, with strong requests for quotes, but low actual purchases. “Delayed deals from Q4 are still not being closed, raising concerns of potential cancellations,” he says. “We are also hearing that budgeting/planning process is still ongoing among many of the customers, which is delaying capital outlay.” He adds that uncertainty could remains for some months to come: “We believe it may not be until May/June timeframe before sustainable demand patterns are established and enterprise customers have a better sense for where the economy is headed.”

Some specific comments on the downgraded stocks:

• Aruba: His price target drops to $13 from $21. He says delays in approval of the 802.11n standard could hurt results on the July 2009 fiscal year. He adds that “valuation is still rich and VC share distribution remains an overhang.” He notes that VCs still own 36% of the company’s shares, down from 51% before the recent expiration of the lock-up agreement.
• Packeteer: His target is cut in half to $6 from $12. “Despite a new product roadmap, we anticipate another challenging year,” he writes. “Our checks indicate the pipeline of activity and forecasts remain stable, however, there is a lot of uncertainty as to when the deals will close. We believe customers are delaying their purchase decisions and expect 2008 to be fairly back-end loaded year in terms of IT spending.” He chopped his 2008 EPS estimate to 20 cents, from 45 cents; his revenue estimate goes to $180.3 million from $165.4 million.
• F5 Networks: His target drops to $26 from $50. “F5 remains a market leader with solid execution and good product roadmap, but we believe the market fundamentals are deteriorating,” he writes. “Last year, F5 aggressively hired sales people, which are likely taking longer to ramp.” He says the demand environment is “relatively soft,” and contends March guidance will likely be below the consensus of $162.1 million in revenue. He also notes that the company has significant exposure to the financial sector.

This morning:

• Aruba is down $1.62, or 14.1%, to $9.88.
• Packeteer is down 35 cents, or 7.3%, to $4.42.
• F5 is down $1.59, or 7.1%, to $20.95.