Ciena Initiated With Buy, $22 Target At Drexel Hamilton

Over time, Ciena Corporation CIEN has significantly diversified its customer base. Drexel Hamilton’s Greg Mesniaeff initiated coverage of the company with a Buy rating and a price target of $22.

Ciena's customer base, which originally comprised of major telco carriers, now also includes cable operators, Internet content providers, data center operators, and large enterprise network operators.

Increased Spending On Bandwidth Enhancements

Telco carrier spending on network upgrades decelerated through 2015, following heightened spending levels the previous year. Analyst Greg Mesniaeff expects investment in bandwidth-enhancing infrastructure to increase significantly in the back half of 2016 and in FY17.

“We are bullish on CIEN shares because we feel that the "bandwidth revolution," which has entered a new stage with mobile data consumption, is poised to see another quantum leap forward with 5G and IoT deployments,” Mesniaeff commented.

Robust Growth Outlook

Ciena generated operating margin of 11 percent in FY15, up from 4 percent a year ago and 1.4 percent three years ago. Gross margin expanded from 42.7 percent in FY12 to 44.7 percent in FY15. The analyst estimated revenue growth of more than 8 percent for FY17, as compared to the company's recent top-line growth of 6-7 percent per annum.

“Although the stock has a history of short-term volatility, the company’s steady rise to the top of the carrier supplier pyramid should give shares a long-deserved valuation premium, in our opinion,” Mesniaeff wrote.