Consider Buying Ciena if It Misses Earnings

Consider Buying Ciena if It Misses Earnings

Communications equipment maker, Ciena , has been impressive in 2013 so far. The company trumped estimates on both earnings reports this year, posting profits while the Street originally expected losses.

Ciena has gained 30% this year on the back of impressive results and solid prospects. But will the company be able to keep up its momentum after the upcoming third-quarter results on Sept. 4?

Great expectations
Analysts, according to Yahoo! Finance, are expecting Ciena to post revenue of $533 million. The company should have no difficulty meeting those estimates since its own guidance calls for revenue between $515 million-$545 million.

Given the fact that Ciena's backlog grew in the previous quarter, and order inflow remained strong, a revenue beat remains a possibility.

Ciena delivered huge positive earnings surprises over the past two quarters. However, the earnings forecast for the third quarter of $0.16 per share is way above the loss of $0.04 per share last year and $0.02 in the second quarter.

The earnings outlook seems quite optimistic. Ciena expected its gross margin to remain in the low-40s, which would be in line with the 42.5% gross margin posted in the second quarter. Operating expense is also expected to remain flat from the second quarter. Since revenue is expected to grow just 4.3% on a sequential basis, Ciena might find it difficult to satisfy the highly optimistic bottom line estimate.

But, if Ciena misses on the bottom line and the stock plunges, opportunistic investors should consider adding to their long positions since prospects look bright.

Think long term
Ciena's customer base is very diverse. The company has more than 1,000 customers and the majority of its top 20 customers buy multiple products spread across Ciena's portfolio. Management stated on the previous conference call that the multi-year infrastructure upgrade cycle has begun. Increases in data consumption, mobile growth, and cloud computing are expected to be the company's growth drivers.

For instance, AT&T , which is a 10%-plus customer, has been aggressively deploying its LTE network and now covers 326 markets. Ma Bell intends to cover 270 million people by its LTE network this year, up from the previous expectation of 250 million. It will be investing a total of $40 billion over the next two years on infrastructure as it looks to catch up with leading LTE provider Verizon, which currently has 500 markets covered by LTE.

Carriers in the U.S. are expected to spend $90 billion by 2017 on LTE expansion and maintaining their networks. Given the fact that Ciena counts AT&T, Verizon, and Sprint as customers, it is in a great position to benefit from telecom spending in the U.S.

Watching the trend
The trend in the optical networking industry also looks positive. Component provider Finisar , which is a supplier to Ciena, posted terrific results late in June and management stated that both its data communications and telecom businesses were doing well. Moreover, Finisar's management stated over the previous conference call that it is expecting stronger telecom spending in the second half of the year.

Finisar's telecom business has been sluggish of late. Telecom revenue had dropped 12% on a sequential basis in the previous quarter due to lower spending by telecom carriers. But stronger telecom spending in the second half and Finisar's focus on innovation, such as a cost-effective and more efficient 100G module, should get its telecom business back on track.

Finisar's outlook indicates that better times lie ahead for optical networking companies and equipment makers. And given the moves being made by Ciena's major telecom customers and the sentiment of its supplier, one can expect the company to provide a robust outlook.

The bottom line
It remains to be seen whether or not Ciena will beat the highly optimistic bottom line estimate, but the company's prospects look good. Ciena has a large customer base with important telecom carriers around the world on its client list. The industry also seems to be doing well on the back of network upgrades and growth in cloud computing.

Hence, if Ciena falters after its upcoming earnings report, investors should consider using the opportunity that arises to buy more shares since its long-term prospects appear sound.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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