For a mere billion-dollar stock -- a small cap by today's standards -- Ciena's (Nasdaq: CIEN ) earnings report yesterday sure attracted a lot of attention. I predicted bad news earlier this week, so by all rights, it shouldn't have come as a surprise. By my count, there are nearly five dozen articles discussing the news clogging up the Yahoo! Finance feeds already -- and the week's not yet done.
So why are you adding one more?
Simply put, because I think everybody else is getting this story all wrong.
Yes, Ciena failed to meet expectations yesterday -- but only just barely. Sales growth of 24% fell an optical fiber's breadth short of analyst estimates. Per-share profits, once changed to the "adjusted" form that management often prefers, met expectations of $0.37. And net profits of $0.12 per share, while not pretty, were caused in part by the writedown of certain commercial paper investments of which I warned Tuesday.
Yes, too, Ciena reduced fourth-quarter revenue estimates to roughly $200 million. But even though CEO Gary Smith warns that "sales cycles are lengthening" as major telecoms (Ciena sells to such giants as AT&T (NYSE: T ) and Verizon (NYSE: VZ ) ) become more cautious about their capex, it now seems certain that Ciena will participate in the predicted telecom infrastructure boom that Cisco (Nasdaq: CSCO ) spoke of a few quarters back. Ciena is helping Cisco build the Global Sprint (NYSE: S ) Tier 1 IP Network.
Time to weigh risks ...
The risk here -- and the reason for the sell-off -- is clear. Ciena assures us that it has "seen no project or order cancellations." Still, Ciena's sales will almost certainly decline in fiscal Q4 -- the first time that's happened at the company since January 2004.
... and rewards
And yet, at the midpoint of guidance, we're still looking at $922 million in sales for this year. If Ciena can maintain this year's net profit margin of 8.9%, that should work out to nearly $82 million in profit by year-end, giving the firm an attractive P/E ratio of about 14.
Moreover, if Ciena manages to generate free cash flow at the current run rate, that would give us a price-to-free cash flow ratio of around 8.6. Assuming Ciena eventually resumes the growth path that analysts have plotted for it (16.9% per annum over the ), that makes the stock look downright dirt cheap.
What did we expect out of Ciena last quarter, and what did we get? Find out in:
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