$CIEN Q2 Earnings Preview

by Enis June 3, 2014 1:27 pm • Commentary

Event:  CIEN reports its fiscal Q2 earnings Thursday after the close.  The options market is implying a 10% move for the event, which is essentially in line with both the 4 quarter average of about 10.5% and the 8 quarter average of about 9.75%.

Sentiment:  Wall Street analysts are very positive on Ciena, despite the stock’s 22% decline so far in 2014.  There are 19 buy ratings, 6 hold ratings, and no sell ratings on the stock, and the average 12 month price target is around $28, more than 50% higher from the current price.  Short interest is around 20% of the float, though it has hardly changed over the past 2 years (generally around 15-25% of the float in that period).

Options Open Interest:  Open interest is skewed towards calls vs. puts, by a ratio of 1.45 to 1.  The 1 month average volume has also favored calls over puts, this time by a ratio of 2 to 1.  The June 20 calls have over 7500 of open interest, which is the most for the front month.  The July 20 calls and the Jan15 20 calls both have over 10k of open interest, and the July 20 put strike is the only line with over 15k of open interest.   

Price Action/Technicals:  CIEN is near its lowest level of the past year.  The stock is still holding above $18 support (in red), which is the critical level to watch on the downside:

[caption id="attachment_41196" align="alignnone" width="600"]CIEN daily chart, Courtesy of Bloomberg CIEN daily chart, Courtesy of Bloomberg[/caption]

On the upside, $20 is first resistance, coinciding with the falling 50 day moving average.  $22 is more important resistance as it was support throughout the winter.  On a bad report and a break of $18, the June 2013 earnings gap at $16.31 is the spot to watch.

Fundamentals/Valuation:  CIEN’s selloff since its March earnings report has been quite a sight to behold considering that little incremental news has come out with regards to the company’s prospects.  The analyst day in early April yielded no new developments (we put on a trade for that event and took it off for a wash), which did lead to more selling following the event.

Ciena’s problem has always been inconsistency.  The network specialist has increased sales fourfold over the past decade, but the stock has not moved.  Earnings per share has fluctuated between positive and negative throughout that period.

Coming into 2014, analysts were once again optimistic that CIEN was taking the steady, consistent path with regards to earnings growth.  They still have 20-40% EPS growth modeled for the next couple of years.  But market participants are clearly much more skeptical.  When CIEN lowered margin guidance in early March, perhaps that was why traders quickly hit the sell button.  Prior history with CIEN says that those compressed margins can eventually lead to more EPS contraction down the line.

Analysts have modeled in a consensus EPS of 0.97 for 2014, but CIEN’s stock price under 20 is an indication that most investors view that number as too high.  If CIEN can execute and meet analyst expectations, the stock is likely headed higher from here, perhaps substantially.  Of course, with Ciena, that’s a big IF.

Volatility:  Implied vol in CIEN looks fairly priced, nearly in line with the average over the past 8 quarters:

[caption id="attachment_41197" align="alignnone" width="600"]CIEN 30 day implied vol, Courtesy of Bloomberg CIEN 30 day implied vol, Courtesy of LiveVolPro[/caption]

The implied move of around 10% is also in line with the 4 and 8 quarter average moves. A 10% move in either direction would put the stock around $16.75 on the downside or $20.50 on the upside.

Our View:  CIEN has had a mighty fall in the past 3 months, with the stock losing nearly a third of its value.  That has occurred without a major catalyst, though the overall profit backdrop for CIEN looks more challenging after its tepid guidance in the prior quarter and the relatively weak Q2 spending environment for telecoms (especially AT&T).

Yet, CIEN’s stock decline has priced in an awful lot of bad news, and the stock sits near the $18 support level, which is a big spot.  Risk/reward here seems to favor the bulls.  Since implied volatility is quite high, if we do do a bullish structure, it will likely be a structure that looks to take advantage of elevated front month premium.  We’ll be sure to update by tomorrow’s close if we pull the trigger.