Ciena Corporation (NASDAQ:CIEN) is up 5% this week following its latest earnings announcement. Ciena reported quarterly revenue up 2% year over year, but still posted a net loss of $0.39 per share. Ciena did reveal a solid backlog, which coupled with a rebounding economy, should allow the company to post positive earnings next fiscal year. The fundamental driver of Ciena’s demand is the continued rise in bandwidth consumption. Ciena’s focus on helping carriers transition to next generation networks places it in one of the fastest growing segments of the telecommunications market.
Ciena is a leading supplier of optical transport technology and saw FY2011 (ended in Oct.) sales come in 40% higher YOY, driven by its 2010 acquisition of Nortel’s Metro Ethernet Networking segment. Ciena has made several acquisitions to expand its addressable market and enter new growth areas, with a key buy of Nortel Network and its optical networking capabilities. This acquisition expanded Ciena’s products portfolio and global reach, pushing it into the emerging markets of Asia and Africa.
Ciena has significantly expanded its operating market by shifting to data networking from optical networking over the last few years. This has helped Ciena enter a broader optical and data-equipment market. Ciena is increasingly investing in this area to “capture” the tremendous growth opportunity presented by rising bandwidth demand from network service providers. Billionaire Ken Griffin – founder of Citadel Investment Group – is one of Ciena’s big name investors (check out Ken Griffin’s newest picks).
Ericsson (NASDAQ:ERIC) pays a high dividend yield (for the communication industry) at 3.6%. This could be due to the company’s less-than-stellar expected growth rate; by offering a robust dividend yield Ericsson is able to keep shareholders’ interest. The sell-side expects annual earnings to grow by roughly 9% a year over the next half-decade; this is below Ciena by six full percentage points. Ericsson had billionaire Ken Fisher – founder of Fisher Asset Management – as one of its key income-seeking investors last quarter (see Ken Fisher’s top tech bets).
Juniper Networks, Inc. (NYSE:JNPR) is up over 10% this week after seeing an upgrade at Cantor Fitzgerald, partially due to an announcement to acquire the remainder of its unowned Contrail shares. Despite three straight quarterly earnings beats, Juniper is still relatively flat year to date, but is neither a value –17x earnings–, nor a growth –13.5% long term growth rate– play. Ray Dalio of Bridgewater Associates gave Juniper a vote of confidence last quarter by taking a new position in the stock (see Dalio’s other big bets).
Cisco Systems, Inc. (NASDAQ:CSCO) is more of a value play than a growth play, but has a global reach. Even being a giant in the communications industry at a $100+ billion market-cap, Cisco still has higher expected growth than some of the other smaller, more nimble tech stocks. The legendary Jim Simons took a large new position in Cisco in 3Q (check out Simons’ newest picks).
Adtran, Inc. (NASDAQ:ADTN) is a maker of communication network solutions and is down 35% year to date following two quarterly EPS misses, including a 3Q miss of 20%. The communication company appears to be far from a value play with a forward P/E at 26x, compared to a 16x trailing P/E. Its 10% long-term growth rate puts its PEG at 2.5. Adtran had notable billionaires fleeing from the stock in the third quarter, with Israel Englander, Ken Griffin and D.E. Shaw all selling their entire positions (check out D.E. Shaw’s newest picks).
From a valuation standpoint we consider Cisco a best-in-industry opportunity, but would still opt for Ciena’s growth. Cisco’s dividend is relatively new, starting dividend payments in 2011, and already yields 2.8%. This is slightly below Ericsson’s 3.6% yield, but Cisco’s payout is only 23% of its earnings compared to Ericsson’s 55% payout ratio. Cisco trades at the bottom of the five companies listed here, on a forward P/E basis at 9x earnings. At 32x earnings, Ciena is the most expensive, and Ericsson (14x), Juniper (17x) and Adtran (26x) are all at a premium to Cisco. What helps investors overlook Ciena’s high-end P/E is its 3-year expected earnings growth rate of 190% annually. One of Ciena’s peers is also on our list of top ten tech stocks loved by hedge funds (see which one).
