The stock of Ciena (NYSE:CIEN, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $56.6 per share and the market cap of $8.8 billion, Ciena stock gives every indication of being significantly overvalued. GF Value for Ciena is shown in the chart below.
Because Ciena is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 11.2% over the past five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Ciena has a cash-to-debt ratio of 1.55, which ranks in the middle range of the companies in Hardware industry. Based on this, GuruFocus ranks Ciena's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Ciena over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Ciena has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $3.5 billion and earnings of $2.27 a share. Its operating margin of 14.79% better than 86% of the companies in Hardware industry. Overall, GuruFocus ranks Ciena's profitability as fair. This is the revenue and net income of Ciena over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Ciena's 3-year average revenue growth rate is better than 76% of the companies in Hardware industry. Ciena's 3-year average EBITDA growth rate is 26.3%, which ranks better than 80% of the companies in Hardware industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Ciena's ROIC is 15.42 while its WACC came in at 6.60. The historical ROIC vs WACC comparison of Ciena is shown below:
In closing, the stock of Ciena (NYSE:CIEN, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 80% of the companies in Hardware industry. To learn more about Ciena stock, you can check out its 30-year Financials here.
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