CIENA and Bookham: A Good Match?

by: Jeremy Richards

CIENA Corp. (NASDAQ:CIEN) looks undervalued with about $11 a share cash on hand, and trades at about the same price.  The company has a book value of  $11.28 a share, trades at a forward P/E ratio of 15.5 and trades at 1x sales.

11 analysts cover CIEN with price targets that range from $12 to $24 a share with an average target of $15.

CIEN could be in the acquisition market, and with a large amount of cash on hand, Bookham Inc. (BKHM) is the first idea that comes to mind. CIEN recently picked BKHM  for its tunable universal transceiver products. 

James Zik, senior product marketing manager at Ciena said:

We made the decision to use this next-generation footprint tunable pluggable module for our 10Gb/s transmission to provide our customers superior shelf density, pay-as-you-grow optical scalability and reduced hardware sparing.

The Bookham product offers Ciena the ability to achieve flexible, multi-reach 10Gb/s integration with removable line-side optics for enhanced service ability at lower cost points, as well as the ability to incorporate unforeseen future enhancements on a per-channel basis.

Looking at the balance sheet, BKHM has zero debt, and trades well below its book value of $1.49, which makes it more of a value play than others in the sector. BKHM is undervalued, trading with a Forward P/E of 18 and just 0.4x sales with a growth rate of 39%. The growth rate is almost four times that of JDS Uniphase (JDSU), and twice that of Finisar Corp. (NASDAQ:FNSR), which was my favorite in the group. But now, BKHM, at the current stock price of $1.18, is far too good of a bargain to pass up.

BKHM is a take over candidate with $50 million cash on hand, debt free and just 101MM shares outstanding. Some players in this space could easily offer 2x book  or about $3 a share.

Six analysts cover BKHM and have targets from $2 to $4. The most recent analyst is Paul Bonenfant at Morgan Keegan, who started coverage on 7/16/2008 with an outperform rating and $3 target. Bonenfant said the company continues to benefit from an expanding customer base, and its timing of new product introductions.

At the time he initiated coverage, BKHM was trading at around $1.70 per share, which is nearly 45% above the current price.

Disclosure: No position in JDSU. Long FNSR. Adding new positions in BKHM and CIEN.

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