Ciena is one of those best-of-breed technology stocks I’ve always wanted to own, but have never been able to due to its sky-high rating. Until now. After the collapse in equity valuations, its share price is now languishing near an all-time low of $11 a share compared to $800 in 2000. This is a great buying opportunity.
Much of the slump has been caused by a destocking at telecoms customers such as AT&T and BT. But this “air-pocket” in order flow will be shorter and shallower than during the dotcom collapse. This time round capacity shortages are already hurting many network operators, while rampant internet growth shows no sign of slowing, partly due to popular bandwidth-hungry services such (internet television and file sharing (IPTV).
Ciena (Nasdaq: CIEN), rated OVERWEIGHT by Barclays Capita
For instance, in March, 42 million people tuned into Hulu.com, the web’s biggest site for TV viewing, and 163 million IPTV subscribers are predicted by 2013.
This trend will help all telecoms equipment makers, but especially Ciena, which is top in terms of its cutting-edge technology. It has enjoyed 30% annual growth rates since 2004, boosted by strong demand for its equipment, which allows network operators to handle huge quantities of online traffic. The firm has just achieved another world first by launching the fastest optical switch on the planet, enabling transmission speeds of 100 gigabytes per second. That’s ten times faster than rival systems and 12,500 times swifter than the typical British broadband connection.
A new version of its leading CoreDirector product, already deployed by about 50 large telecoms companies, should hit the streets later this year. And let’s not forget China. Last year, Beijing awarded its first 3G mobile licenses to the local wireless carriers, which should trigger a whopping $40bn spending spree on equipment from the likes of Ciena.
Wall Street expects revenues of $659m for the year ending October, generating an underlying earnings per share (EPS) loss of 21 cents. Sure, the immediate outlook is murky, but this pessimism looks overdone, especially as in 2008 turnover and EPS came in at $902m and $1.17 a share. The board is also slashing costs, cutting headcount by 9% last quarter. Ciena is at the forefront of the telecoms eco-system and should continue to gain market share despite recession, particularly as some of its competitors (eg, Nortel) are in disarray. I value the stock on at least four times 2008 gross profits. After adjusting for its $260m cash pile ($2.30/share), it generates an intrinsic worth of around $18 a share.
So are there any catches? As well as the tough economic environment, Ciena is exposed to price deflation, lumpy orders, customer-concentration and ongoing restructuring issues. There are also foreign currency considerations for UK investors, as America accounts for 60% of sales. Plus there’s a chance that being smaller than many of its rivals, it could get squeezed if carriers decided to hack back their supplier base.
However, with its large bank of intellectual property and leading position in a growing market, Ciena looks a choice play for the more adventurous investor. Next quarterly results are due out on Thursday 4 June.
Recommendation: adventurous BUY at $11
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments