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2HRS2GO: Market reels in Ciena

COMMENTARY -- This week's retreat in shares of Ciena (Nasdaq: CIEN) isn't the real surprise. The truly amazing thing is that they held up so long.

CIEN dropped more than a dozen points today on worries about the financial health of a European customer, and the possibility of lower sales to Sprint (NYSE: FON), now that Alcatel (NYSE: ALA) has become a Sprint supplier. Reuters quoted an anonymous analyst who pointed out that these concerns are not news.

He's right, of course. Many communications equipment vendors saw their market caps fall in recent months as analysts fretted about lower telecom capital expenditures. Lately, not a day goes by when someone doesn't shiver about capex estimates.

Yet Ciena shares have survived relatively well until last Friday.

To be sure, Ciena had already fallen more than 31 percent since reaching an all-time high closing high of 149.5 on Oct. 20. In fact, over the last two months Ciena has tracked other optical-network-specific stocks closely:

However, you can also see that Ciena remained at loftier levels. Wall Street may have cast a pall over the entire industry, but Ciena managed to stay above the haze.

I wonder why, because Ciena seems as vulnerable as anyone to a capex slowdown. Less than three weeks afte posting good results in the third quarter, the company said it would record a fourth quarter charge because it couldn't collect $28.2 million owed by another European client.

Ciena's core products boost fiber optic network capacity by increasing the number of wavelengths that can be transmitted over a fiber line. Obviously, bandwidth demand won't fall off anytime soon, so Ciena will sell plenty of dense wavelength division multiplexers.

Few people have ever doubted that it's a strong market. The question is, how strong? How fast will it grow? More important, how much equipment will communications carriers buy?

Some analysts believe the communications industry stocked up on equipment earlier this year, though you get differing accounts from optical network suppliers. Ciena hasn't indicated any changes to its guidance; First Call consensus currently predicts a profit of 64 cents per share next fiscal year.

But neither has anyone else. Even Nortel Networks (NYSE: NT), the company that jumpstarted all the jitters about optical networking growth next year, hasn't lowered its bottom line expectations.

Considering the broad industry nervousness, combined with the fact that Ciena (unlike Corning, Nortel, Alcatel, Cisco or almost any other network equipment vendor) is entirely dependent on optical networking for its business, it was only a matter of time before Ciena took a major, concentrated hit.

This latest Bluestone report about potential Ciena sales was merely an excuse for the market to use the same release valve on CIEN that has already been opened for everyone else in the sector. CIEN has lost more than 30 percent this week.

Yet it's worth pointing out that even with today's losses, Ciena trades at almost 110 times next year's earnings, an astounding valuation for a bull market, and an unreal multiple in the current environment. Even compared to another optical pure-play -- such as components maker JDS Uniphase (Nasdaq: JDSU) with a forward multiple of 68 or so -- Ciena looks mighty expensive.

Sentiment is just now catching Ciena from behind. And there's still plenty of air beneath CIEN. 22GO>