Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
With the 5G internet revolution on the horizon, analysts at Oppenheimer have decided Ceragon Networks (CRNT 2.45%) is a smart way to profit off of it. Today, they're upgrading the shares of the telecom from perform to outperform and assigning a $4.50 price target, implying as much as 50% upside from pre-upgrade prices.
But is Oppenheimer being overoptimistic, or is Ceragon worth a look? Here's what you need to know.
A little background detail
Things aren't going great for Ceragon lately. In the company's most recent quarterly earnings report, filed last month, Ceragon reported a 5% drop in revenue and contracting profit margin. Net income per diluted share declined 33% to $0.04 per share. Regardless, Ceragon actually beat earnings expectations for the quarter, StreetInsider.com reported, and "bookings" of new orders "continue to support our target quarterly revenue run rate of $80 to $85 million during the second half," CEO Ira Palti explained at the time.
"We are increasingly optimistic about the longer-term outlook as we work with operators to plan and implement projects to upgrade, densify and optimize their networks on the road to full 5G deployments during the next several years," he added.
Upgrading Ceragon stock
Turns out Oppenheimer is pretty optimistic about Ceragon's chances as well. In today's upgrade, the analyst writes that "Ceragon's steady execution, IP-20 tech. differentiation (spectrum efficiency, carrier aggregation, TCO advantages), and all-outdoor leadership" all make the stock a likely candidate to profit from "the upcoming 5G build-out."
In the meantime, "We expect 4G LTE build-outs to provide [near-term] support," says Oppenheimer.
How long is the meantime?
Granted, there may still be a while to wait between now (4G LTE) and then (5G). Although both Verizon and AT&T are planning to begin pilot projects utilizing 5G internet this year, Fool.com contributor Chris Neiger notes that "[w]idespread rollouts of 5G, for both mobile and fixed wireless services, aren't expected until 2020."
This means that, even if Oppenheimer is right about Ceragon having the right kind of tech to profit from 5G, investors may have to wait a few years for the money to truly begin rolling in -- and maybe even longer than that.
According to analysts polled by S&P Global Market Intelligence, Ceragon is only expected to post 2% sales growth this year, and 1% next year. Even in 2020, the year Chris points to for when 5G will really start rolling, Wall Street is only expecting to see Ceragon post 3% sales growth.
Earnings, on the other hand, could grow significantly faster, as even modest revenue growth allows Ceragon to cover more of its fixed costs. Although expected to decline this year, for example, even the 1% to 3% sales growth Ceragon is predicted to enjoy over the next couple years is expected to translate into 60% earnings growth through 2020.
What it means for investors
Are you willing to wait a couple of years to find out if Oppenheimer is right about Ceragon? Personally, I'm more of a wait and see...then invest kind of investor. But I have to admit that the valuation on Ceragon stock today does entice.
With a market capitalization of just $238 million, no debt, and $29 million in the bank, Ceragon carries an enterprise value of just $209 million. Weighed against the company's $16 million in trailing earnings, that works out to an EV-to-earnings ratio of just 13 -- not bad at all for a company that might see earnings grow 60% in two years.
True, free cash flow at Ceragon doesn't quite measure up to reported income. Then again, as I review the company's cash flow statements for the past three years, I notice that free cash flow over the entire period exactly matches reported earnings -- indicating that Ceragon's quality of earnings actually is quite high, even if it may not look it at present.
All things considered, I have to say that at current valuations, Ceragon stock looks strong enough to take a gamble on. Its future may not be certain, but its price is certainly cheap.