Ceragon Networks: Growth at a Discount

Wireless network equipment provider Ceragon Networks (Nasdaq: CRNT  ) capped off 2007 by delivering what it promised six months ago -- about 40% revenue growth. The Motley Fool Hidden Gems recommendation reported fourth-quarter earnings that included a revenue increase of 40%, to $46.1 million. The full year was even better -- the company's sales increased 49% over 2006, to $161.9 million.

On a GAAP basis, the company reported net earnings of $4.4 million for the quarter and $13.1 million for the full year. Considering that Ceragon was still reporting losses last year, one would think that the new profit trend would be reason to celebrate -- yet investors spanked Ceragon shares for a 17% loss yesterday.

Ceragon's shares had jumped over the past few days after an upgrade from banking firm Collins Stewart, so the drop puts the stock at essentially the same level as last week. But it escapes me what drove such a negative reaction to the company's earnings. Granted, the company guided revenue to an essentially flat range of $44 million to $48 million for next quarter, and expects revenue growth of "only" 25% to 30% for 2008 at this point.

But Ceragon is piecing together a solid operations picture. Gross margins are holding at around 36% and operating margins have been increasing toward the goal of 10% the company would like to see in 2008. Ceragon has been very successful at winning business through OEMs such as Nokia (NYSE: NOK  ) and Siemens (NYSE: SI  ) , as well as directly to major customers such as Sprint Nextel (NYSE: S  ) and Vodafone's (NYSE: VOD  ) Essar subsidiary in India.

Future trends look very positive for Ceragon as well -- the company noted that it doesn't see any impact from larger economic issues at this point and expects demand to continue. Since Ceragon's products help carriers cut costs and meet surging bandwidth needs, its items are more of a need than a want. Wireless carriers such as Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) must upgrade their networks over the next several years to deal with the huge demand for broadband wireless data, giving Ceragon plenty of opportunities around the world.

So even with dilution from a recent share offering, there's a lot to like about Ceragon's prospects. The dip in the stock makes the growth more attractive at a current GAAP earnings multiple of 24, particularly if the company can deliver on revenue and earnings growth targets.


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  • Report this Comment On January 29, 2008, at 11:30 PM, bill853210 wrote:

    As a possible answer to the statement "it escapes me what drove such a negative reaction to the company's earnings," perhaps it is the company's EPS: 452. When that high, the "market" expects not just good performance announcements but miraculous.

  • Report this Comment On February 06, 2008, at 11:47 AM, gonen1232009 wrote:

    Luckily for us, their are analysts who give earning forecasts. The "market" listen to them and we, the value (fool) investors get very cheap stocks of great companies...

    Thank you analysts. Keep doing what you are doing...

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