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View Stan Piland's Comments
Ciena Corporation - Well Positioned To Grow Future Revenue As Profitability Remains An Issue
Nice description of CIEN's progress, but your conclusions regarding profitability and valuation are truly bewildering.
First, optical networking is a cyclical business with significant operating leverage. Experienced value investors know the time to buy cyclical stocks is when they are at the bottom of a cycle, i.e. when there is no "E" to calculate the P/E ratio. When they look cheap on reported earnings, it's probably time to sell them. CIEN is probably in the second inning of an emerging carrier capex cycle, and estimates for the next few years are almost certainly too low.
Second, while it is normally prudent to look at GAAP earnings rather than the adjusted earnings tech companies use to cover up stock-based compensation, a close look at CIEN's financials shows that most of their adjustment to the GAAP loss actually reflects non-cash amortization of intangible assets. Arguably, adjusted earnings provide a better reflection of the true economic profits of the company, despite the accounting conventions.
Using non-GAAP earnings, CIEN actually reported a 2 cents profit in the F2Q. Consensus estimates have risen to 50 cents for F2013 and 96 cents for F2014, and these numbers incorporate a bump in share count from 102 mil to 152 mil to reflect dilution from the convert beginning in the F3Q. I think expectations will continue to rise, as they always do when a cycle progresses. I am forecasting F2014 eps will actually be north of $1.25, particularly if the economy stabilizes in Europe. Importantly, these estimates only assume recovery in the telecom expenditure cycle. If, in addition, we see a recovery in enterprise tech spending, upward revisions to sales and profits will be higher still.
Historically, CIEN has peaked at 4-5X revs at the top of the cycle. If it only gets to 2X F2014 revs or 25X my $1.25 F2014 earnings estimate, then the stock should go to $30 within the next 6-12 months, with additional upside if/when we see an acceleration in enterprise spending.
Disclosure: I own CIEN, and I'm not selling!
Jun 8, 2013. 01:39 PM
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