Telecom Equipment Stocks Look to Follow This Massive Quarterly Beat

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There is perhaps no industry that is more difficult to assess than the telecom equipment space. It seems like every time you think the industry is moving in the right direction, something happens to knock the industry down. With that said, we can’t deny the incredible quarterly performance of Ciena Corporation (NASDAQ: CIEN), and if the company is right, it could be an exciting six months for others in the space.

The Quarter At A Glance

Ciena Corporation simply crushed Q2 expectations with an EPS of $0.02 (beats by $0.03) and revenue of $507.7 million (beats by $24.36 million). As a result, its stock climbed higher by 17.41% on Thursday – not only because of its quarter – but also due to its guidance.

Ciena’s revenue guidance for Q3 is more than $20 million better than the consensus. Its strong results pushed the entire space higher – but investors are still hard at work to determine whether or not Ciena’s strength is industry-wide or company specific.

Forcing Telecom To Spend

First, Ciena is the leader of integrated Ethernet/optical networking hardware. This industry alone accounted for 57% of Ciena’s total revenue, producing growth of 10% year-over-year. Thus, this is strength within the company’s quarter that might not be industry-wide, and may leave investors exposed after the entire industry traded higher.

However, the company did make specific comments to demonstrate strong performance throughout the industry. For one, the company noted that two U.S. companies accounted for 31% of its total sales. Although Ciena did not mention by name, we can assume the company’s referring to AT&T and Verizon.

Next, the company indicated that Web/mobile traffic might be increasing faster than telecom companies anticipated; thus propelling capex higher regardless of how much these companies “want” to spend. To me, this signals that Ciena’s quarter might be a result of this traffic and that its gains were caused by the necessity of growth throughout the space.

As I said, this is a tough space to assess. Last November, AT&T (NYSE: T) announced that it would be boosting its capital spending by 16%, to $22 billion, for the following three years. The increase was intended to improve the company’s wireless and wireline networks. With this boost, Ciena among others would clearly benefit.

In April, AT&T then surprised us all with its lack of conviction when the company lowered capex guidance by $2 billion for each year, to $20 billion. Therefore, AT&T’s guidance removed $2 billion of the original $3 billion that it had planned to spend. Yet, according to Ciena, growth and traffic is forcing these companies to spend, regardless of their wishes.

The “Company” To Benefit Most

While countless telecom equipment stocks traded higher in response to Ciena’s strong quarter, Alcatel-Lucent (NYSE: ALU) is the one that I find most appealing. Alcatel traded higher by 4.76% to create new 52-week highs and has seen a 35% increase over the last month.

The reason that Alcatel-Lucent is so compelling following this news is because it is a diversified telecom equipment company and is also AT&T’s largest equipment vendor. AT&T has already announced its intention to bring LTE to 300 million people by mid-decade and Alcatel is the company that’s building that network. With an increase in traffic, it is possible that this coverage plan is being built faster than AT&T anticipated.

Moreover, Alcatel-Lucent is a very cheap company. Currently, it is trading at just 0.20 times sales with operating margins of 0.37%. The company’s top-line growth was less than 1% last quarter – but the company is in the process of a massive restructuring program that will make it smaller although much more efficient. Hence, I think Alcatel makes a compelling buy right now!

Final Thought

Once Alcatel is finished with its restructuring program it will be focusing on its growing industries only, such as the U.S. Ciena is a much smaller company, about one-tenth the size, and trades at 0.90 times sales. Both companies operate in the same space, although Alcatel is much more diversified and open to whatever trends take place in the industry. Therefore, if Ciena is right, and telecom companies are being forced to spend more money, then I do think that Alcatel-Lucent is a cheap stock to watch. 

Brian Nichols is long ALU. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus