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Ciena Hit on Lehman Note

A cautionary note on Ciena Corp. (Nasdaq: CIEN) helped send optical stocks reeling this morning, fueling a growing belief among analysts that Ciena won't outrun the downturn demon after all.

Analyst Steven D. Levy of Lehman Brothers trimmed the firm's fiscal 2002 sales estimates by roughly 9 percent, from $2.698 billion to $2.440 billion. He now sees year-to-year growth closer to 40 percent than 54 percent, and EPS estimates of $1.00 instead of $1.11.

The changes, while not a formal downgrade, apparently shook investors. At press time, Ciena shares were trading at 31.28, down 3.26 (9.44%). The Ciena hit, in addition to a generally miserable day for Nasdaq Composite stocks, weighed on the entire optical sector. The Light Reading Index of optical stocks hit a new all-time low, sinking 23.44 (8%) to 269.32 in afternoon trading.

Additionally, Levy lowered the firm's 12-month stock price target from $80 to $50. He's maintaining Lehman's "Strong Buy" rating on Ciena shares, however. But he advises buyers to wait until after Ciena announces its next quarterly results later this month, since "management may tighten the FY02 sales growth guidance range," limiting "share price appreciation in the near term."

Levy's is the latest in a chorus of analyst warnings about Ciena (see Ciena Skeptics Emerge). Like the others, he believes Ciena is starting to feel the pinch of the constricting telecom market, despite the share growth that has kept it out of harm's way up to now.

The reason for this is that the long-haul DWDM market, in which Ciena plays, is expected to remain in a downturn for the foreseeable future. Experts cite a range of reasons for this, including an overabundance of bandwidth, the ongoing progress of component development, and the lack of carrier capital to fund new buildouts (see Carl Russo: Cisco Avoiding the Core).

All these snares have finally hooked Ciena, which initially boasted of bypassing the downturn altogether. Still, Levy stressed the changes made in Lehman's outlook don't reflect negatively on Ciena's products, potential, or business model.

"The change in our sales forecasts result solely from lower expectations for long-haul DWDM sales," he writes. "Concerns about general slowdown in carrier spending make it difficult for Ciena to find a place to hide."

Levy appears confident Ciena can meet its key challenges, including pricing pressures, a perceived lack of product diversity, and a customer roster based disproportionately on orders from Qwest Communications International Corp. (NYSE: Q) and Sprint Corp. (NYSE: FON), which are expected to drop off a bit as initial installations level out.

"We believe that gross margin pressure from aggressive system pricing remains more of a possibility than a probability for Ciena," Levy writes. "[We] still believe the long-term sales prospects for the product are quite strong and the company is not a 'one-trick pony'... We believe that at least through the end of fiscal 2001, sales to service providers such as Tycom and Flag Telecom and possibly one or two other carriers should ramp fast enough to make up for the expected declines in Sprint and Qwest."

Ciena did not return queries on today's note at press time.

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
whose 12/4/2012 | 8:07:42 PM
re: Ciena Hit on Lehman Note Mary,

who came up with this article's title - won't a more appropriate title be...

"Ciena Crushed by Lehman Note" ?

or "Ciena Kicked in the... by Lehman Note"?

I think these titles are more journalistic.
whose 12/4/2012 | 8:07:42 PM
re: Ciena Hit on Lehman Note Wall Street's Darling Any Longer?

Immune?

Outgrowing the Market?

ruskiss 12/4/2012 | 8:07:38 PM
re: Ciena Hit on Lehman Note I am not a frequent poster, and this is not limited to optics, BUT...

why do stocks of very good, valuable companies like Ciena react so severely to a single whiff of bad news? Analysts are given too much credit for knowing more than they know. OK, so growth is slowing to "only" 40%. In the current economic conditions, I'd say that's mighty fine!

I do not hold stock in Ciena or an other optical venture, but it irks me is all.
Hazy 12/4/2012 | 8:07:35 PM
re: Ciena Hit on Lehman Note It's simple. While Ciena's clearly a valuable company, at yesterday's closing price it was trading at about 185x trailing twelve months' EPS (an earnings "yield" of far less than 1%). To provide a long-term financial return commensurate with even low risk alternatives like treasuries, which yield about 5% now, it HAS to grow its EPS rapidly. Since no one knows with much certainty what will happen in the future, any whiff of lower EPS growth is likely to result in lower valuation. Immediately.
sanddune 12/4/2012 | 8:07:23 PM
re: Ciena Hit on Lehman Note Heard today morning that luxcore
is going down, >50% laid off.
check out black politics at work!
heeehoooo
puddnhead_wilson 12/4/2012 | 8:04:56 PM
re: Ciena Hit on Lehman Note >While Ciena's clearly a valuable company, at yesterday's closing price it was trading at about 185x trailing twelve months' EPS. (an earnings "yield" of far less than 1%). To provide a long-term financial return commensurate with even low risk alternatives like treasuries, which yield about 5% now, it HAS to grow its EPS rapidly

You make a common mistake of novice investors, you are including the cost of the Cyras acquisition in your PE calculations, a charge that wipes out almost all of Ciena's trailing earnings (am I guessing right that you just took the PE off yahoo's main page, or some such place, and didn't work up from the quarterly breakdowns?). The billion-plus they ended up paying for Cyras is not "lost" money -- there is surely some value in a new product that thye expect to contribute to be accretitive within 12 months. Therefor you should exclude this charge when looking at Ciena's earnings for valuation purposes.

Doing so takes Ciena's trailing PE from 185 to under 50.
lighthearted 12/4/2012 | 8:04:53 PM
re: Ciena Hit on Lehman Note given that the cyras product is still in beta, and that redback and juniper are both targeting the same market, i would say that ciena is expensive by any measure - long haul dwdm is not exactly robust these days, and metro revenues are still not guaranteed...
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