Ciena Corporation (CIEN), Cisco Systems, Inc. (CSCO): A Better Networking Investment Than the Big Boys?

With a solid record of rapidly increasing sales, and very nice growth ahead, Ciena Corporation (NASDAQ:CIEN) just landed on my radar. With the recent gains in the stock market (we seem to be hitting record highs daily), it becomes more important than ever to be extra selective and to hunt out the remaining bargains in the market. With Ciena still a ways off from its 52-week high, and even further from its pre-recession peak, this telecom company is growing too fast to ignore.

Ciena

Ciena Corporation (NASDAQ:CIEN) specializes in upgrading dated communications networks to next-generation standards, capable of the latest high-bandwidth services. The company’s largest customer is AT&T Inc. (NYSE:T), and almost half (47%) of Ciena’s business is international.

Ciena Corporation (NASDAQ:CIEN) has worked with AT&T for more than 15 years to meet the demands of their growing network and has been tapped by AT&T to help with the upgrade to next-generation network architecture. In fact, AT&T has been so pleased with Ciena’s performance that they named Ciena a 2013 AT&T Supplier Award winner. AT&T Inc. (NYSE:T) is currently in the process of upgrading their entire network, and hopes to be done with its implementation by 2014. That should help then become more competitive with rivals like Verizon Communications Inc. (NYSE:VZ), especially in terms of mobile web connectivity speeds.

The company operates in four main segments, so let’s see what each one does. By far the largest segment, the converged packet-optical segment, accounts for about 52% of the company’s revenue and provides networking solutions to allow automated packet-optical networks. Products include optical switches and processors, to name a few. The packet networking segment (7% of sales) includes products designed to support business data services.

The optical transport segment (19.3% of sales) provides solutions that increase network capacity and provide efficient high-speed transmission of video, voice, and data. Finally, the software and services segment provides all of the company’s support services to its customers, such as installation, maintenance, and training.

It’s (NOT) All About the Numbers

With Ciena Corporation (NASDAQ:CIEN)’s recent history of operating losses (2013 is projected to be Ciena’s first profitable year since 2008), a glance at the numbers would scare off a large percentage of investors. However, with a company like this, you can’t value it on its past performance as much as what the future might have in store. Mobile network technology seems to be evolving at its most rapid pace yet, and Ciena is clearly good at what it does.

Analysts are projecting double-digit revenue growth for the foreseeable future and a profit of 43 cents per share this year, rising to $1.12 per share by 2015. After the recent dip in share price, Ciena Corporation (NASDAQ:CIEN) trades for just 13.8 times 2015’s consensus earnings, which I think are a bit conservative due to skepticism based on past performance.

Competing With the Big Boys

Most of the competition to Ciena is in the form of major players such as Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR), so let’s take a look.

Cisco, the world’s largest manufacturer of computer networking products, just recently had a great quarter and their shares have spiked a bit since. Cisco Systems, Inc. (NASDAQ:CSCO) dominates the Ethernet switching and router markets, and does its business all around the world, and aims to get their customers ready for the next generation, 100-gigabit technology. Shares are not quite as cheap as they were before this past week’s report, but still trade at a pretty cheap 13.5 times earnings, which sounds even better considering the company’s $32 million in net cash (cash minus debt) and 2.8% dividend yield, which is sure to attract some income investors.

Juniper Networks, Inc. (NYSE:JNPR) is much smaller than Cisco Systems, Inc. (NASDAQ:CSCO), but still several times larger than Ciena. Juniper produces IP networking solutions, with a focus on routers for service providers. Like Ciena, Juniper’s revenue is expected to grow at a fast pace over the next few years (around 15%), and the stock trades at a pretty fair valuation of 20.3 times earnings. Using a similar argument as above, Juniper trading for 12.3 times 2015’s projected earnings makes it seem like a pretty attractive investment.

Buy, Sell, or Hold?

Despite being the smallest company mentioned, I like Ciena Corporation (NASDAQ:CIEN)’s odds here. With its shaky track record of profitability, it trades at a very steep discount relative to its potential. The rapid increase in network bandwidth consumption that is expected over the next several years should keep all three of these companies busy for years to come. None of these are a bad idea as an investment, and Cisco Systems, Inc. (NASDAQ:CSCO) is definitely the most stable and safe of the bunch. But on a risk/reward basis, a smaller up-and-coming player like Ciena could pay off huge in the long run.

The article A Better Networking Investment Than the Big Boys? originally appeared on Fool.com and is written by Matthew Frankel.

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