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A Few Reasons Why Ciena Is a Solid Investment

June 24, 2014 | About:

Telecom equipment company Ciena (NYSE:CIEN) has been struggling. A disappointing performance by Ciena has led to a 20% drop in shares since late October, also driven by Cisco’s weak guidance in November. But can Ciena make a comeback, and is it a solid buy?

What gives?

Everything seems to be against Ciena as of now. The company is consistently falling, failing to live up to its outlook. With higher start-up costs, the company has failed to maintain its gross margin. Its gross margin fell by 280 basis points from last year. This impacted the company’s earnings as well. Its EPS came in at $0.16 per share, which failed to satisfy the Street’s estimates of $0.24 per share for its bottom line. On the other hand, Ciena expects revenue between $515 million and $545 million in the current quarter, below the consensus estimate of $537.6 million at the mid-point.

But Ciena did see some growth in its top line as a result of accelerated roll out at one of its key international customers. But, the company’s operating expenses were higher than expected. Higher orders led to an increase in performance-based variable compensation, along with an increase in research and development spending.

Not as gloomy as it seems

The present scenario seems depressing from Ciena’s point of view. It looks like it couldn’t have been much worse for Ciena. The stock has been impressive on the stock market in the past, but its poor results are upsetting and it ignores Ciena’s terrific growth. The company’s revenue was up 25% from last year, while it reduced its net loss to $9.8 million from $38.8 million in the year-ago period. Also, if Ciena achieves the mid-point of its revenue outlook in the first quarter, it would be reporting year-over-year growth of around 18%.

However, Ciena is also impacted by the growth guidance of networking giant Cisco. Cisco reduced its revenue growth guidance. Cisco expects its top line to grow at 3%-6% per year over the next three to five years, down from the earlier forecast of 5%-7%. This led to fears of a slowdown in telecom and network spending.

Looking ahead

Ciena also sees opportunities on the international front. Ciena management is optimistic about its prospects in markets such as Brazil and India, where it has landed Tier 1 design wins. Recently, Ciena has also won a contract from Cablevision Argentina, which is a leading cable TV and Internet services provider in Argentina to enhance its broadband network country-wide.

The company’s strategic moves are also expected to benefit it in the long run. According to the latest news, the Company has also entered into a global partnership with Vodafone and is expecting this association to grow in 2014. Ciena is also seeing strong business in North America, which led to a solid growth of 73% in packet networking revenue over the previous fiscal year. Hence, it is not surprising to see that Ciena’s year-end backlog grew 12% on the back of such customer wins, exceeding the $1 billion mark. This means that the company is seeing strong order patterns and this should translate into better top-line performance in the future.

According to recent studies, the WDM segment is gaining market share and is seeing strong traction in North America, growing about 20% in the past. As Ciena is a strong player in the WDM segment, this news can be a growth driver.

Ciena is also focusing on improving its profit margins in 2014. It is focusing on reducing its operational expenses. However, management is expecting operating expenses to grow slightly, resulting in an adjusted operating margin in the range of 7%-10%.

Final words

Despite Ciena’s woes, the company seems well-positioned for good performance in the future. Though the company might be facing some brisk edges in its business, yet its financials are strong. Its future outlook indicates that the company is making aggressive moves to hold a profitable edge in the market by reducing its losses. Also, the earnings growth forecast of Ciena for the next five years is strong and promising at 16.7%

Considering Ciena’s impressive growth, the stock doesn’t look too expensive at a forward P/E of 16. Thus, investors looking to initiate a long position in Ciena should consider its recent pullback as an opportunity since its long-term prospects look good.

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