What's Going On With Ceragon?
By
Dave Mock
March 14, 2008
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One of the more frustrating aspects of owning stocks is seeing them drop from time to time for what appears to be no reason at all. Investors in Motley Fool Hidden Gems selection Ceragon Networks (Nasdaq: CRNT) have done their share of head-scratching lately because the stock has been nothing but down, shedding more than 50% of its value in the past six months.
Stock in Ceragon, which makes network backhaul solutions, is even down almost 30% from when I called it cheap only a few weeks ago after its fourth-quarter results were released. Little has changed since that time, so you can guess my opinion now.
Fundamentally, the picture Ceragon offers has changed little, but the market's perspective has changed radically as the outlook for the economy gets bleaker by the day.
The situation with Sprint Nextel (NYSE: S) -- which was supposed to be leading a nationwide WiMAX network deployment with Clearwire (Nasdaq: CLWR) -- has become nothing but even more painful. Investors had pinned Ceragon as a significant beneficiary of the build-out because it was providing its IP backhaul solutions. Because they didn't see sugar daddy Intel (Nasdaq: INTC) or even cash-rich Google (Nasdaq: GOOG) throw wads of cash into the WiMAX mix, investors appear to be writing off this opportunity for Ceragon in the near term.
But Ceragon has a very diversified customer base, with much of its revenue coming from international markets. In 2006, for example, roughly 38% of Ceragon's revenue came from Europe, the Middle East, and Africa, while 30% came from Asia Pacific and 26% from North America. With this diversity in global customers like Vodafone (NYSE: VOD), the company projects 25% to 30% revenue growth for 2008.
At its price of about $6.50 per share, Ceragon is trading at only 15.9 times its 2007 diluted GAAP earnings per share. Company management expects net income to increase at a rate even higher than sales in 2008, so assuming that GAAP earnings grow by 30%, Ceragon's forward multiple is an attractive 12.2. Even though dilution from a share offering late last year will eat into EPS somewhat, Ceragon is still priced at a steep discount to its projected growth.
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