Analysts Set Higher Targets for CIENA

By Hal Plotkin
Silicon Valley Correspondent

"CIENA is our top pick right now," says Hasan Imam, an analyst at Donaldson Lufkin & Jenrette in New York.

The DLJ analyst has a $260 12-month price target on the stock, up from the $150 range he and most other analysts who follow CIENA had tabbed, prior to the release last week of the company’s fiscal third-quarter revenue and earnings numbers.

CIENA’s stock has recently regained the territory it lost early this year.

CIENA 52-week stock performance chart

Analysts attribute the round-trip performance to several factors, including the recent technology sector selloff, worries about valuation levels in the optical sector and, most importantly, concerns about competition in the optical-equipment sector from newer competitors, such as Corvus Systems Inc. and Oni Systems Corp. {ONIS}, as well as from industry giant Nortel Networks Corp. {NT}.

CIENA’s most-recent quarterly report, however, did a lot to allay those fears.

Last Thursday, CIENA reported revenue of $233.3 million for its third fiscal quarter ended July 31. Net income for the quarter came in at 19 cents a share, 2 cents above the consensus analyst estimate provided by First Call Corp. The numbers represented sequential revenue growth of more than 25 percent over the company’s fiscal second quarter and more than 80 percent, compared with the same quarter a year earlier, when the company reported revenue of $128.8 million.

CIENA also announced a two-for-one stock split that will become effective on Sept.18.

"F3Q00 clearly shows that CIENA has proven its ability to deliver product to its customers and as a result is reaping the benefits," Christopher Crespi, an analyst at Banc of America Securities, wrote immediately after the quarterly numbers were released.

Crespi reiterated his "buy" rating on the stock and upped his price target to 269 from 150.

"What happened to Ciena last year is water under the bridge," says Paul Silverstein, an analyst at Robertson Stephens in New York. "What’s going on today is a company that is improving in terms of execution on what is already a robust and accelerating market opportunity." Silverstein rates the stock "buy."

"I love CIENA," Silverstein says. "It’s my favorite stock idea."

The analysts say CIENA’s progress is related to the company’s success in bringing a new high-margin optical-switching product to market ahead of competitor Nortel Networks, as well as the company’s success in opening up sales opportunities in metropolitan markets. CIENAs previous focus was primarily on the long-haul carriers who were the first customers interested in the company’s pioneering dense wave division multiplexing (DWDM) technology.

DWDM allows a communications carrier to dramatically increase the number of simultaneous conversations or data streams that can be transmitted over a single
fiber-optic line.

CIENA’s current opportunity stems from serving that burgeoning market as well as selling its new optical switch, called MultiWave CoreDirector, which works in conjunction with DWDM fiber-optic lines.

"Optical core switching is a very hot area," says Bill Choi, an analyst at PaineWebber in New York. "CIENA’s box allows [carriers] to do the heavy lifting, replacing the previous switches, as well as addressing the exploding demand for traffic."

Like the other analysts, Choi also set a new 12-month price target for the stock, in his case 255, after the company’s numbers came in last week. His "buy" rating on CIENA’s stock is his company’s highest recommendation.

Imam says CIENA has beaten its chief rival in the optical-switching market, Nortel, to the punch. "I certainly think Nortel is not to be trifled with," he says. "But they’re not shipping [a comparable product] yet. They’re taking orders, but CIENA has a six-to-eight-month lead."

In addition, Imam says it usually takes a telecommunications carrier about half a year to test and qualify a new optical switch before purchases are made and actual installations take place. It will take at least that long, he says, for competitors to get their competitive switches certified by customers and in the game.

CIENA’s most-recent quarterly report notes recognized revenue from the sale of its new optical switch to three undisclosed telecommunications carriers.

"There were some worries earlier this year that CIENA’s technology might not work out," Imam says. "But the deployments tell you the box works."

"CoreDirector is on track to surpass expectations as the first viable opaque switch to reach the market," Crespi agrees. "We believe this puts CIENA in a very strong competitive position."

The analysts say that investors will eventually realize that last year’s CIENA isn’t this year’s CIENA, and that it deserves a valuation that is at least closer to that of high-flying sector favorites such as Sycamore Networks Inc. {SCMR}, which trades at about 600 times its four quarter forward earnings.

"I would say the stock is trading at at least a 75 percent discount to its group," Imam says. "The Nasdaq correction earlier this year hurt the stock, and the market has been coming back selectively. I think what we’re seeing now is a much more healthy run-up than what happened earlier. It’s now much more based on fundamentals."

Like Imam, the other analysts who follow the stock emphasize that their new price targets are based primarily on the company’s actual performance, rather than any sky-high valuation benchmarks.

Choi says that his $255 12-month price target is based on 150 times his estimate of CIENA’s fiscal 2002 earnings. Although that is still rich territory, it is nowhere near the stratospheric valuations given to a younger company such as Sycamore, he says.

"It’s the same multiple we’ve been looking at for a while," Choi says. "The target is based on the new improved outlook, but the multiple hasn’t changed that much. CIENA is right back where it started last year. But now we’re looking at a much better outlook for the future."