The Earnings Predictor: Ciena Corp

Here's a preview of Ciena Corp in advance of Thursday's earnings report

By Jamie Dlugosch Aug 29, 2011 11:28AM

There is a tremendous amount of noise in the market that can influence stock price. Ultimately, the value of a stock is based on the present value of future profits.

 

When a company reports earnings results, market participants receive a key piece of information that can be used to determine the price of a stock. For a brief moment in time after a company releases its operating performance, the market will adjust pricing based on how the numbers match up against current expectations.

 

In many cases stocks of companies reporting results will move significantly higher or lower.

 

Understanding how investors use earnings against Wall Street estimates creates a profitable trading opportunity. Using a few key variables combined with understanding how the market will react to new information can guide you how to trade a stock in advance of the news being reported.

 

Use the Earnings Predictor to help you identify winning trades. On Thursday Ciena Corp. reports earnings for the quarter ending July 31, 2011.

 

Current situation:

 

Ciena Corp. missed estimates by a wide margin for the quarter ending April 30, 2011:

Earnings History

Jul 10

Oct 10

Jan 11

Apr 11

EPS Est

-0.33

-0.15

-0.16

-0.11

EPS Actual

-0.09

-0.18

-0.14

-0.24

Difference

0.24

-0.03

0.02

-0.13

Surprise %

72.70%

-20.00%

12.50%

-118.20%

 

Technology stocks have been hit hard during the recent market correction. Ciena’s shares started to collapse after a very poor report in the most recent quarter. The stock is down some 55% since that news was released. As a result Wall Street estimates for the current period have been ratcheted lower. For the quarter ending July 31, 2011 the expectation is for Ciena to post a loss of 21 cents per share. 90 days ago the estimate was for a loss of 2 cents per share.

 

6 Cheap Tech Stocks to Avoid

 

For the full year ending October 31, 2011 the average Wall Street estimate is for the company to lose 70 cents per share. In the following year the company is expected to make a profit of 56 cents per share. Both of those numbers are substantially lower than where they were 90 days ago. At current prices Ciena trades for 19 times fiscal year 2012 earnings estimates.

 

Over the last year shares of Ciena are down 17%

 

Analysis:

 

With expectations for a double dip recession technology shares have been hit hard. Since July 22, 2011 shares of Ciena fell by 39%. Even with the losses shares are still not cheap. Wall Street estimates have moved substantially lower. Given the variability to earnings estimates from Wall Street, the door is open for the company to beat reduced expectations. Given the still premium valuation there is risk of further losses in the stock should the company miss expectations. Technical traders will note the clearly defined head and shoulders pattern forming on the one-year chart. Such a shape suggests further losses are possible. Investors would be wise to see last week’s share loss of Omnivision Technology when that company released earnings that failed to inspire.

 

Earnings Beat Probability: CIEN has a 50% chance of missing earnings when it releases results on Thursday.

 

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