Foolish Forecast: Ciena Shines, Price Glares

• Email
• Share
• Print

For most of last year, and into early 2008, telecom equipment maker Ciena (Nasdaq: CIEN) has beaten Wall Street's earnings predictions with a stick. How much longer will the analysts take this abuse before they raise the bar too high for Ciena to clear it?

What analysts say:

• Buy, sell, or waffle? Twenty analysts still speculate on Ciena's outlook. Eleven say to buy it, eight more vote hold, and one says to sell it.
• Revenue. On average, they're looking for 23% sales growth in Q2, to $238.3 million.
• Earnings. Pro forma profits are expected to rise 42% to $0.37 per share.

What management says:
If you recall from last quarter's Foolish Forecast, bullish feelings for Ciena have hinged on bullish prognostications from rival Cisco (Nasdaq: CSCO) and customer AT&T (NYSE: T). The former predicted that this industry is on a long-term growth trend, with only "short-lived and shallow" obstacles along the way. Reinforcing that view, AT&T announced $1 billion in upgrades to its network, which could mean more business for Ciena -- perhaps much more, if Verizon (NYSE: VZ), Sprint Nextel (NYSE: S), Comcast (Nasdaq: CMCSA), or their ilk feel compelled to keep up with AT&T's investment boom.

Ciena soon chimed in with its own thoughts. It stated that "indications from our customers to date suggest no change in the fundamental drivers of Ciena’s business," keeping the company on track for 27% revenue growth this year.

What management does:
Combine strong sales growth with continued growth in margins (as shown below), shake well, and I see good prospects for great profits this year.

Margins	10/06	1/07	4/07	7/07	10/07	1/08
Gross	45.7%	46.2%	44.7%	45.0%	46.5%	48.1%
Operating	(3.8%)	1.2%	2.9%	4.5%	5.6%	6.2%
Net	0.1%	2.9%	4.9%	9.0%	10.6%	11.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Now I've got some bad news, some good news, and some more bad news for you:

• Bad news: With lofty expectations come a lofty valuation. Ciena shares currently sell for 20% more than they cost before last quarter's earnings report. Simply put, the shares command a multiple of 30, which looks expensive relative to the Street's projected 17% growth rate.
• Good news: Fortunately, Ciena is now generating more cash profits than the GAAP rules permit it to report as "earnings." As a result, the company's price-to-free cash flow ratio is cheaper at 26.
• The other bad news? That's still too high a multiple to pay. Ciena's good, but it ain't that good.

Whatever news Ciena releases tomorrow, stay away from this stock until its valuation returns to earth.

What did we expect out of Ciena last quarter, and what did we get? Find out in:

• Ciena's Quiet Confidence Speaks Volumes
• Foolish Forecast: Will Ciena Get Its Share of the Pie?