Tel-Aviv based Ceragon Networks (NASDAQ: CRNT) will be releasing its second quarter earnings on July 20. After a miserable first quarter, in which profits fell 95% over the year-ago quarter, investors are skittish about the stock's prospects. My view: for investors, Ceragon is a good long-term play.
Here's why. First, the company has got a great business. It is a key player in helping wireless carriers increase the speed at which data flows over their networks. The company's equipment connects wireless base stations to a mobile operator's main network, where traffic flows. It's this transmission technology that is critically important to carriers as demand for data services -- and for smartphones -- rises. And they are both rising.
It's also more cost effective. Wireless carriers traditionally used leased T1 lines to funnel traffic between the base station controllers and the mobile switching center. They work just fine, but they are one of the largest recurring costs for wireless operators. At some point, it clearly becomes more cost effective to use wireless equipment -- the sort that Ceragon makes -- instead.
The company also just got a big boost in demand for its products from India-based Tata Teleservices, which is rolling out 3G networks in India, using Ceragon's equipment.
There are more catalysts. Among them, growth will come internationally, with Latin America becoming a hotbed of activity. In addition, demand for Ceragon's products is likely to continue in North America and with more people buying iPhones and BlackBerrys. AT&T (NYSE: T) and others will need to keep upgrading their networks. While Ceragon will benefit from Tata Teleservice's expansion in India, it also has ties with other Indian operators, such as Bharti and Reliance, that are also deploying third-generation networks.
Because demand will be picking up for Ceragon's products I believe that the company will generate sales of $180 million this year and and earnings per share of 16 cents. The earnings number should more than double by 2010 to 37 cents per share.
Shares of CRNT now trade around $6.56-about 29% below the stock's 52-week high of $9.31. CRNT has about $41.6 million in cash, up from $28 million at the end of 2008 and no debt. It has a gross profit margin -- despite the tough times – of 33% compared to 26.7% for its closest competitor, Harris Stratex Networks (NASDAQ: HSTX).
Given the rising demand for Ceragon's equipment and the company's improving financial condition, I think it's reasonable to expect that the company's shares could be trading one year from now at a similar multiple to earnings as it trades today. At its current level, shares of CRNT are trading at 34 times 2009 expected earnings of 19 cents per share and just 17 times 2010 expected earnings of 37 cents per share. Given the demand for its products, I'm comfortable valuing CRNT at 34 times 2010 expected earnings.
At that multiple, the stock would trade for over $12 per share within the next year -- an increase of 90%.
Nikhil Hutheesing is the former editor of Forbes Wireless Stock Watch and is now an assistant managing editor at DailyFinance.com.
For more from me information on Ceragon's business, see this story on DailyFinance.
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Reader Comments (Page 1 of 1)
7-12-2009 @ 6:58AM
Gunther Karger said...
The dramatically increasing use of mobile devices which are increasingly enabled to deliver high speed content including video and data streaming web content lead to upgrading of backhaul and ast mile delivery networks. Ceragon is in the backhaul segment which network operators are forced to significantly upgrade nearly regardless of the weak economy to remain competitive an d even maintain their present retail market share.