Shares of Ciena
How it got here
I'm mildly in disbelief that Ciena is moving higher, given the trouble telecom equipment providers have had in squeezing mainline investment spending out of big telecom providers. In recent months, almost all spending has been diverted to building up back-end cloud-computing capabilities at the expenses of fiber-optic product, switching, and networking product providers. It's obvious that telecoms will need to increase spending to handle the increased bandwidth and storage. However, how much it'll be and when that'll happen remains a mystery.
Ciena's management seems to think that spending uptick will come sooner rather than later. It has been undeniably optimistic that growth would be much better in the second half of 2012 than in the first half, leading many to boost the share price higher. In Ciena's most recent quarter, product revenue rose 14% and adjusted gross profit rose nearly 10%. With an order uptick in the coming months, Ciena may indeed be set up to head significantly higher.
Let's not forget, though, that there's another, highly uncertain, side to this equation. Cisco Systems
How it stacks up
Let's see how Ciena stacks up next to its peers.
In the race to the bottom, Alcatel-Lucent is clearly winning, although Cisco and Ciena are both chipping in with sizable five-year losses.
Price/ Cash Flow
|Ciena||N/M||17.7||37.9||$636 million / $1.44 billion|
|Cisco Systems||1.8||8.3||8.6||$48.4 billion / $16.4 billion|
|Alcatel-Lucent||0.6||17.6||8.4||$6.16 billion / $5.97 billion|
Sources: Morningstar, Yahoo! Finance. N/M = not meaningful.
One thing you'll notice that puts Ciena at a disadvantage from the start is its net debt position. Cisco is creating an insane amount of cash flow annually, which gives it a level of product diversity and negotiating power that Ciena just doesn't have. Alcatel-Lucent has a good amount of cash as well, but it has also been dealing with steady losses and a massively underfunded pension plan, which threatens to chip away at its remaining cash.
One aspect all three do share in common is that they needed mainline infrastructure spending to step up so as to grow profits. Each of these three has done what it can in terms of cost-cutting, and they made need to take further steps in the cutting process to bring supply more in line with demand.
Now for the $64,000 question: What's next for Ciena? That question depends on when big telecoms decide to step up spending, if Ciena can garner lure large customers away from choose Cisco and Alcatel-Lucent, and if it can pay down at least some of its net debt position.
Our very own CAPS community gives the company a two-star rating (out of five), with 85.6% of members expecting it to outperform. Although I've yet to make a CAPScall in either direction, I'm going to change that now by entering a CAPS limit order of outperform with a target price of $14.
I can almost guess what you're thinking: "$14 is quite a way away!" And yes, you are correct. What's important to note is that expectations have been high from Ciena's management while Cisco, Alcatel-Lucent, JDS Uniphase, Acme Packet, and most of the equipment sector have either blatantly missed on earnings or lowered their outlooks. Ciena's 100GB products are a growth driver in terms of big data transmission, and I think the company is a long-term winner, but I'd feel much more comfortable getting in closer to $14 than chasing it here at a new high, especially with the prospect that it could take months or years before spending really ramps up.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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