Ciena's Low-Margin Move

Ciena (CIEN - commentary - Trade Now) agreed to purchase the metro Ethernet assets of Nortel for $530 million in cash and $239 million in convertible notes. Ciena outbid Nokia Siemens, a joint venture of Finland's Nokia (NOK - commentary - Trade Now) and Germany's Siemens (SI - commentary - Trade Now), for these assets, valuing the global optical networking division at 0.65 times sales.

Jim Cramer's Take

Ciena's Move Is a Winner

Mike Genovese of Soleil/Elevater Research had thought Ciena wouldn't go that high in a bidding contest. The deal makes Ciena the No. 3 player in the space with roughly a 10% market share of the optical networking category. But it is acquiring lower margin, more legacy-oriented assets.

Ciena will probably get domain status at AT&T (T - commentary - Trade Now) and will have a strong digital signal processing technology for 40G and 100G networks and have a larger global footprint. On the negative side, Genovese sees "huge integration risk" while changing the company's profile from high margin, high growth to a lower margin, more legacy-product focus.

The balance sheet also is weakened as it goes from a net cash position of about $300 million to net debt of $500 million if the deal is completed. Earnings are diluted as well. Calendar 2011 revenue forecasts are now $1.97 billion, up from a stand-alone $822 million. Earnings for 2011 go from an estimated $1 a share to a forecast of 55 cents. Geneovese rates Ciena a "hold" and his price target is $11 based on one times enterprise value to 2010 sales. He feels that a sell recommendation needs at least a 20% potential move.

Better news came out of Washington for Lincare Holdings (LNCR - commentary - Trade Now). Lincare provides home oxygen services and the Center for Medicare and Medicaid Services issued its payment rates for durable medical equipment, including home oxygen, for 2010. The new rate for stationary home oxygen, a majority of Lincare's business, was higher than anticipated.

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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.