Ciena Stock Looks Attractive Compared To Corning

by Trefis Team
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Ciena Corporation (NYSE: CIEN), best known for its network hardware, software, and services, trades at about 1.8x trailing Revenues, compared to 2.4x for Corning (NYSE: GLW), which manufactures glass products and optical fiber, among other products. Does this difference in valuation make sense? While both the companies have benefited from 5G expansion over the recent past, Ciena is being weighed down by cautious guidance due to continued pressure in the pandemic. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical Revenue Growth, Returns (ability to generate profits from growth), and Risk (sustainability of profits). Our dashboard Corning vs. Ciena: Is GLW Stock Appropriately Valued Given Its significantly higher P/S Multiple Compared to CIEN? has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

Between 2016 and 2019, Corning’s Revenues grew by about 22%, rising from around $9.4 billion to $11.5 billion, partly driven by the acquisition of 3M’s communications business, and strong growth at the company’s Environmental Technologies, which includes ceramic substrate and filter products for gasoline and diesel applications in the automotive industry, and Life Sciences, which includes consumables, such as plastic vessels, specialty surfaces, and general labware and equipment for pharmaceutical companies. On the other hand, Ciena’s Revenues grew by about 38% between 2016 to 2019, rising from around $2.6 billion to $3.6 billion, driven by relatively steady growth at networking platforms and associated services.

2. Returns (Profits)

While Corning’s Free cash flows as a % of Revenues stood at about 18% in 2019,  dropping from around 27% in 2016, Ciena’s Free cash flows as a % of Revenues stood at about 12%, up from around 8% in 2016. While the Return on Invested Capital metric for both companies has been volatile, Corning’s ROIC was slightly higher compared to Ciena’s in 2019, standing at about 6.5% versus about 5.1%. Ciena’s Total Shareholder Returns (TSR) have been much higher, driven by a surging stock price though the company has never paid dividends. Corning raised its dividend per share by 48% between 2016 and 2019, but its stock has underperformed.

3. Risk

Corning’s Debt load is higher with its Debt to Equity ratio standing at about 31% as of 2019, rising from 15% in 2016, as its total debt increased from $3.9 billion to $7.7 billion. Ciena’s Debt to Equity ratio has declined from 52% to about 10% over the same period, as it reduced its debt from $1.3 billion to $0.7 billion. Overall, neither company appears to have very meaningful financial risk.

The Net Of It All

Ciena’s Revenue Growth, Returns, and Risk metrics compare quite favorably with Corning, and we don’t think this really justifies the difference in the Ciena’s P/S multiple of 1.8x versus 2.4x for Corning. The valuation for Corning is being driven by investor interest in its gorilla glass and expansion of 5G. The increased penetration of smartphones globally along with the recent 5G rollouts has meant an increase in demand for Corning products. On the other hand, Ciena’s valuation is likely weighed down by the downbeat guidance in the wake of the current pandemic. However, the impact on Ciena’s sales was minimal given the challenging environment. The company reported sales growth of 1.6% in Q3 while its bottom line surged 64% to $0.92 on a per share basis. This compares with 2.2% sales growth for Corning and a 32% growth in earnings to $0.53 on a per share basis. Ciena provides networking equipment and services to telecom operators for deployment of 5G networks, and this will likely bode well for the stock in the near term. Overall, Ciena appears to be a more attractive bet compared to Corning based on historical performance as well as the current valuation.

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