Goldman Sachs Favors Cisco, Ciena As Telecom Demand Grows

Goldman Sachs analyst Brantley Thompson Thursday writes of recent meetings with “industry contacts” concerning the communications equipment business, and says that he prefers equipment makers Cisco Systems (CSCO) and Ciena (CIEN), and dumps Tellabs (TLAB).

Ciena is widening the gap between itself and competitors such as Alcatel-Lucent (ALU) in terms of the quality of products such as fiber optics transmission equipment, says Thompson, while Cisco should be able to count on at least 20% growth in telecommunications company spending on equipment, without specifying the time frame for that. Tellabs, meanwhile, looks like it will not resume selling into Bell South with the integration of that company into AT&T’s (T) operations, which means forecasts for sales for the second half of this year for Tellabs have to come down, he writes.

Ciena could rise 29% to $44 in 12 months, for a P/E multiple of 25x his estimate of 2008 earnings of $1.81. Cisco could also go up 29%, to $35, on a 25x multiple of an estimated $1.72 for next year (that’s *calendar* year). Tellabs is worth just $11 based on a multiple of 22x.

Cisco shares Thursday were up a third of a percent at $27.30, Ciena shares were up 5% at $35.91, and Tellab shares were up half a percent at $10.75.

CSCO vs. CIEN vs. TLAB 1-yr chart: