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