Ciena Unloved but Running

First, Ciena (CIEN) still appears to be quite the unloved stock. Second, by the time analysts upgrade something, you usually have missed most of the move (same with downgrades!)

But here is a slew of upgrades in past 48 hours, three of which are of the backhand variety

1. Goldman raises target from $47.50 to $55. Analyst Brantley Thompson says Ciena's management increased fourth quarter gross margin outlook to 47%-49% from 45%-47%, said it sees upside to gross margin over longer term. He believes fiscal year 2008 (October) revenue growth will beat Street expectation of 21%, given the company's strong fundamentals; thinks 25%+ more likely. Thompson sees operating margin continuing to exceed estimates and cash flow continuing to improve.
2. UBS (backhand compliment) raise from sell to neutral. Gee thanks, why the sell back down 20% lower in stock price, and then the 'upgrade' now? That's 'value add'
3. JMP Securities mildly impressed: "Based on attending the meeting and speaking with management about the current business trends, it is clear that Ciena feels very confident about the October quarter" and fiscal 2008.... nonetheless kept a "Market Perform" rating on the company. "While we agree that Ciena is doing very well as a company, we remain on the sidelines with regards to the stock," he wrote. "The valuation level remains exceptionally high for a company at or near peak operating margins, with high customer concentration, and with historically lumpy revenues."
4. Merriman Curhan Ford actually bullish: the "long list of positives" the company discussed at the analyst meeting are "only beginning to be reflected in the shares." Among these positives, he said, were a "very upbeat tone regarding the strength of current business trends," and an "explicit upside guidance" on gross margins for the fourth quarter, driven by improved service margins and a favorable product mix. Most importantly, Savageaux added that the "characterization of the company's formal goal of 15 percent operating margins as a 'milestone,'" suggests the potential for an operating model over time stretching toward 50 percent gross and 20 percent operating margins.
5. Morgan Keegan blah: called the company's business trends "favorable" but kept a "Market Perform" rating. "The stock likely holds up well with current favorable trends. We remain cautious regarding the longer term, relative to expectations," he wrote.

So all in all, still quite unloved. While I do agree to some degree, as I am not sure how long of a trend (i.e. how sustainable) this performance is for Ciena, I think we have at least 3-4 good quarters ahead. From there it depends on the spending intent of their large telco customers. I do wonder where these analysts were about 20% ago - wouldn't they have served their clients better upgrading "then"?

As I said, I've cut back a bit around $45 as the stock has had a tremendous run, but would be happy to buy back closer to $40 if the market gives this opportunity. If not, the next stop on this train appears to be $50. Ciena remains the largest position in the fund.

Long Ciena in fund; no personal position