Summary
- Ciena posted strong quarterly results but warned on revenue weakness.
- Valuations are compelling at these levels.
- Ciena stock could rebound back to the $55-60 level in 2021.
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Markets did not expect communications supplier Ciena Corporation (CIEN) would issue downbeat guidance in the quarterly report. The negative tone slashed around $20 from its stock price. Its warning of continued pandemic pressure creates a sharp discount for investors who missed the recent run-up that began in March.
Before that, my last coverage on Ciena, over six years ago, returned a double for readers. At that time, the S&P 500 rose by 90%. After the drop, the stock could outperform for investors as management navigates through the latest uncertainties.
Modest Sales Growth
In the third quarter, Ciena posted non-GAAP earnings per share of $1.06. Revenue grew by only 1.7% year on year to $976.7 million. The gross margin of 48.2% easily beat consensus, so shareholders did not expect an orders slowdown warning. CEO Gary Smith said that Covid-19-related dynamics will have a negative impact on revenue for the next few quarters.
Trading at a price-to-earnings of 18 times, CIEN stock earns an A- on its value grade.
In the last quarter, Ciena held $1.2 billion in cash and investments. It reported a free cash flow of $160 million. Leverage of 1.1 times and net debt of $410 million:
Source: Ciena Q3 Earnings Call
The strong balance sheet will protect the company from any credit events. The cash on hand will keep operations running smoothly. For example, Ciena’s WaveLogic 5 Extreme modem is not just in the sampling or trialing phase. It is shipping the product to a range of customers for commercial deployments. And because it secured around 50 design wins, customers have a strong demand for the product. It offers a faster network rate. Customers already have them running and carrying live traffic.
