By Richard Saintvilus

 

As an investor, it can pay to listen to that little voice in your head telling you to be careful and not get ahead of yourself, particularly when there's a stock that you want so desperately to like.

 

Telecommunications equipment maker Ciena (CIEN) serves as the perfect example. In August when it appeared the stock was poised to take off at $18.38, I opted to wait for a better entry point. It turned out I was right.

 

Today, with the stock sitting at $15 following a subpar fourth-quarter earnings performance, I'm back at this same predicament -- trying to time the perfect buy. Am I pressing my luck?

 

For the period ending in October, Ciena reported a non-GAAP loss of 7 cents per share on revenue of $5.5 million. The company missed on both the top and bottom lines as Wall Street estimates called for a loss of 6 cents on revenues of $468.3 million. Revenue dropped by 1.8% sequentially, however it was up 2% year-over-year, which was encouraging.

 

On a GAAP basis, the company lost $38.8 million, or 39 cents per share. Adjusted gross margin was 42.7% -- worse than the 43.2% logged a year ago. But it was 3% better than the third quarter.

 

In terms of guidance, management expects first-quarter revenue to arrive in the range of $435 to $460 million, which is in line with Street estimates of $458.6 million. These projections are certainly not great. But on a relative basis, they are pretty consistent with the guidance provided by rivals Cisco (CSCO) and Juniper (JNPR).

 

However, these names are much bigger, profitable and more agile. Also both Cisco and Juniper have shown an ability to maneuver and adjust more easily. This is despite intense competition and weaker demand. Still, Ciena's overall results were far from a disaster. And the company did show some meaning sequential improvements.

 

For instance, margins did pretty well, considering they have come under increased competitive pressure. It seems that management understands the challenges that Ciena faces and seems to be making some good decisions. But I just don't believe it's sustainable -- at least not in the long term.

 

Nonetheless, Gary Smith, Ciena's CEO had this to say about the performance:

"With 5% annual revenue growth and fourth-quarter financial performance in line with our expectations, we continued to significantly outpace the market and take share in 2012 despite the challenging environment. That momentum resulted in record order flow and year-end backlog. Customers require more network convergence with greater programmability to deliver more services, and we believe our portfolio is leading the transformation to next-generation intelligent networks."

Those are certainly some encouraging words. But I worry the headwinds are just too rough. Likewise, it seems that investors' expectations remain too high for a company that still operates at a loss. While growth can still come with the company's impressive technology, but a lot has to go right for Ciena to turn things around.

 

If Ciena can show that it can innovate and leverage its existing technological advantage to fight off pricing pressure, then it certainly has a chance. Too, with so much R&D spending of late, the company needs to show investors the fruits of their support. Until then, I just don't see how this stock makes sense right here -- especially not with a price-to-earnings ratio of 32.

 

At the time of publication the author had no position in any of the stocks mentioned.

 

 

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