Ciena: JP Morgan Ups to Buy on 100G Optical Ramp

JP Morgan’s Rod Hall this morning raised his rating on Ciena (CIEN) to Overweight from Neutral, writing that investors should get into the stock before the resuscitation of carriers’ capital equipment spending in the second half of this year.

Hall sees 2.4% growth overall for carrier equipment this year, with 52.2% of that coming in the latter half of the year, he writes. He sees 5.3% growth in 2013, and more “balanced” throughout the year.

And in particular, the catalyst, if you will, later this year, is the ramping up of deployment of 100-gig fiber optic networks, writes Hall:

Based on our carrier and vendor discussions at the MWC [Mobile World Congress] and OFC/NFOEC [Optical Fiber Conference/National Fiber Optic Engineers Conference], we believe a multiyear 100G optical upgrade cycle is on its way. We expect spending to start ramping in Q4�12 and continue through 2013.

That will lead to 7.5% and 10.9% growth in the fiber optics market this year and next, or $14.26 billion and $15.82 billion, he believes.

Moreover, Hall thinks the fastest-growing parts of that 100-gig deployment, long-haul “dense wavelength division multiplexing,” or DWDM, and optical switching, are “right in Ciena’s wheelhouse.”

It has 13.7% of long-haul DWDM globally, and 41.7% in North America. The market may rise 11% this year to $3.52 billion, he thinks. Ciena has 24.9% of optical switching worldwide, and 51% in North America. He sees that market 35.5% this year to $869 million after a 14% decline in 2011.

Hall sees the company’s electronics helping its equipment to stand out:

Ciena�s new silicon chipset, WaveLogic 3, offers 6x the processing power of WaveLogic 2, and scales to 400G for metro and regional applications. We like that Ciena is well positioned to leverage its established installed base and believe the new chips help differentiate Ciena in the developing, but still competitive 100G market.

Ciena shares today are up 7 cents, or half a percent at $16.36.

In a companion report out today, Hall writes that other parts of equipment will see a return to health, with the ethernet switch market, for example, rising 5.1% this year to $20.85 billion. He sees 5.5% growth in carriers’ “core routing” purchases, he writes, but some cooling in mobile backhaul equipment purchases, except in China, given broadband upgrades there.

Wireless infrastructure equipment will actually dip 4.2% this year, he writes, to $37.78 billion. So-called long term evolution, or LTE, equipment revenue is rising, but the older stuff, CDMA, GSM and WCDMA, is declining.

Fin