Ciena: Strong Demand for Optical Components

Citigroup’s Michael Genovese yesterday raised his rating on Ciena (CIEN) to Buy from Hold, and reiterated his buy rating on JDSU (JDSU), noting that demand for fiber optic network capacity is growing rapidly, driven by increased use of Internet video applications. (As it happens, there was a story on this very subject on Page One of the Wall Street Journal yesterday).

Genovese writes that demand from telecom service providers for optical capacity “continues to be resoundingly strong,” driven by broadband Internet and mobile applications. “Globally, carriers are adding capacity to networks in a ‘just in time’ success-based manner and we are not seeing signs of pre-building capacity or inventory backups in carrier warehouses,” he writes. “As a result, carriers are seeing stabilizing prices for optical circuits and there are few, if any, distressed carrier assets with the potential to disrupt wholesale supply and demand.”

Genovese notes that Ciena gets about 75% of its product revenue from optical capacity related products. “We believe the order environment for Ciena remains strong with solid visibility from a large number of customers, including BT (BT), Sprint (S) and Qwest (Q),” he writes.

For the company’s January quarter, Genovese upped his forecast to revenue of $167 million and 24 cents a share from $164 million and 22 cents. He expects the company’s April quarter guidance to be for 5% sequential revenue growth. For the October 2007 fiscal year he upped his estimate to $1.09 a share from 95 cents; for fiscal 2008, he goes to $1.35, from $1.21. His price target goes to $35, from $33.

Genovese says JDSU still remains his favorite pick for “optical capacity exposure,” although he lowered his price target on the stock to $22.50 from $28, shifting his approach to calculating a target for the stock to actual rather than normalized earnings.

Yesterday, Ciena shares were up $1.31 at $39.99; JDSU was up 18 cents at $15.80.

CIEN vs. JDSU 1-yr chart