The problem, however, is that the Street absolutely hated management's second-quarter guidance. It's an overreaction. Ciena's management didn't say anything we haven't heard from Cisco (CSCO) and Juniper (JNPR). And it's not as if Ciena had overpromised in the quarter just completed. Guidance was considered weak when it was issued in December.
The company specializes in broadband, data networking and optical equipment services, which means that it's main customers included (among others) are Verizon (VZ) and AT&T (T). If you follow the telecom sector, you know it's these companies that have under-invested in infrastructure for the past couple of years.
This occurred while analysts predicted strong capacity upgrades that never came. And even though there has been some modest improvement in carrier spending, it's been anything but robust, not just in the U.S. but also abroad.
Cisco's CEO John Chambers has made this clear on several occasions. Somehow it has become Ciena's fault for not promising better days. We have no idea when spending will return to robust levels.
Here's what we do know; although the good times have yet to arrive, Ciena is well positioned to steal and/or preserve market share when carriers can no longer starve themselves. With first-quarter revenue surging 18% year-over-year, management continues to do an exceptional job differentiating Ciena's products and services.
Ahead of the report, there were concerns that Verizon's deal with Vodafone (VOD) would impact the strength of Ciena's relationship with Verizon. It was said that Verizon would no longer "need" Ciena. This, too, was overblown. And with adjusted earnings climbing 8% year over year, the Street has to now explain how it could have underestimated Ciena's performance 116%. The Street expected 6 cents per share. Ciena delivered 13 cents.
As it stands, analysts at RBC, UBS and FBR Capital Markets, all of whom downgraded shares of Ciena last quarter, have to second-guess that decision. The company's shareholders deserve an apology. Likewise, I don't believe the company's management has gotten the credit they deserve.
Ciena is slowly becoming a model of efficiency and an excellent producer of free-cash-flow. The company's converged packet optical division, which accounts for 63% of Ciena's total revenue, continues to grow at an impressive rate. Last year, that segment accounted for 53%. And there are no meaningful signs of slowing down.
What the Street fails to understand is that amid the weak outlook, Ciena's top line and order growth continue to exceed management's own estimates. Analysts should do a much better job at explaining this to investors.
For its performance, CEO Gary Smith said:
"We continue to benefit from the strategic decisions we've made to expand our role and reach in the market, driving more consistent performance and progress toward achieving our long-term operating targets."
In other words, Smith likes Ciena's market position. As do I. And as much as I like Cisco, I don't believe there's another telecom player that can match Ciena's cutting-edge approach to optical networking and traditional packet switching. And this makes Ciena an attractive acquisition candidate for a company like Cisco.
It's not often that a company appears in much better shape than its industry. The only concern to this story is that Ciena's growth goes hand-in-hand with carrier spending. But the company's management has made every necessary adjustment to deliver where and when it matters.
Even with the pessimistic guidance, Ciena's stock remains a buy. And I continue to project fair market value to reach $30 per share by the second half of 2014.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.