Ciena Watchers See Strong Momentum Ahead of Earnings Report

NEW YORK (TheStreet) -- Shares of optical networking specialist Ciena (CIEN), which reports second-quarter earnings Thursday, have outpaced those of several of its peers for most of 2015. And odds are, that pattern won't change anytime soon.

Ciena -- at around $24 per share -- is up some 24% on the year, against flat gains for the broader averages. Further, it has tripled the 7% gains of the iShares North American Tech-Multimedia Networking ETF (IGN) -- home to the likes of Cisco (CSCO) and Juniper Networks (JNPR).

And as evidenced by how quickly the average analyst earnings estimate for the just-ended quarter continues to climb, it would be foolish to sell Ciena shares -- at least not until the Hanover, Md.-based fiber optics company shows meaningful signs that its growth is slowing.

A growth deceleration is not something that's expected for Ciena -- not for several years, at least. The analysts' consensus is that its annual earnings will grow at a 16% average rate over the next five years, including a projected 35% surge for fiscal year 2016, when they see earnings climbing from $1.11 per share to $1.50 per share.

What stands out in these projections? In the past three months, the average analyst estimate for fiscal 2016 has been raised twice. At the start of the just-ended quarter, estimates were $1.45 per share. It was raised to $1.47 and $1.50 in the two months that followed.

That next year's average earnings estimate has jumped 3.5% in three months can be credited to a 15% earnings estimate increase for the just-ended quarter, which now stands at 23 cents per share, up from 20 cents.

Among the bullish analysts is MKM Partners, which on May 20 reiterated its buy rating and boosted its price target on Ciena by 8% from $25 to $27. Citing strong demand for Ciena's 100G optical capacity tech among cable, Internet, and Tier 2 carrier customers, the analysts raised their fiscal 2015 revenue estimate to $2.44 billion from $2.41 billion.

By "Tier 2 carrier customers," MKM is referring to wireless carriers like AT&T (T) and Verizon (VZ). Between them, the telecom giants account for almost one-third of Ciena's revenues, and they haven't spent as much money on infrastructure builds as the industry expected. But things are about to improve.

This means MKM's revenue projections are now above the consensus, which calls for full-year revenue of $2.42 billion -- an expected year-over-year increase of around 6% from last year's mark of $2.29 billion. At the same time, however, MKM's earnings per share estimate -- while it has been boosted to $1.10 (from $1.04) remains a penny below consensus of $1.11 per share.

But here's the thing: Even the $1.10 target still calls for an earnings increase of 86%, against consensus estimates of 88% growth. The way I see it, a penny doesn't matter here. What's more important to focus on are the business improvements Ciena has made -- and continues to make -- while fattening investors' pockets. Based on those, Ciena  looks poised to reach $28 per share in the next 12 to 18 months -- a gain of 15%.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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