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Billionaire Ken Griffin Gets Bullish On Communications

Added on by Lee Ho Fook.
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Be sure to check out our detailed stock analysis (click here). Billionaire Ken Griffin now owns over 5.17 million shares of one of the most under rated communications companies around, Ciena Corporation (NASDAQ: CIEN)In a filing with the SEC, Griffin disclosed that he and his hedge fund, Citadel Advisors, upped their stake in Ciena by five fold and now owns 5.1% of the company. Ciena, is well positioned in the telecommunications equipment industry to meet the rising demand of bandwidth requirements -- more people using more data means a higher revenues Ciena (check out Griffin's latest picks).

Ciena is a provider of communications networking equipment, software and services for transporting and aggregating voice, video and data traffic worldwide. Its largest segment includes its optical transport solutions (60% of revenues). This segment also includes operating systems software and certain software features.

The company also has an impressive presence in the software and services market, accounting for 20% of revenues. This segment includes network management software facilitating planned network maintenance and network trouble identification. 

Not only are its revenue streams relatively diversified, but Ciena also has a positive geographical mix, with a 50/50 split in revenues from the U.S. and internationally -- operating across the U.S. Canada, Latin America, Europe, Middle East and Africa, and Asia Pacific.

Future growth should come from telecom carriers upgrading their networks to meet the increasing demand for bandwidth. In anticipation, CIena has positioned itself as one of the leading suppliers of optical transport technology. 

Cisco Systems, Inc. (NASDAQ: CSCO) is the communications equipment giant with a $100 plus billion market cap and "owning" that market. Cisco has upwards of 60% of the ethernet routing market share. The other positives for the company includes its $46 billion cash position and its 2.6% dividend yield. Cisco is also one of the long-lost tech dividend stocks (see all 5 here). But things go downhill from here.

I remain cautious that Cisco can leverage its size to see the same amount of growth that the likes of a $1.7 billion market cap company like Ciena can. Cisco has already statured its market share potential in its key segments and is now seeing the likes HP and Juniper undercutting its prices to get a piece of the market. This has also caused Cisco to counter by lowering its prices, compressing its gross margin by over 200 basis points the past two years. 

Juniper Networks, Inc. (NYSE: JNPR) and Cisco, together, own almost 80% of the core router market, but Alcatel Lucent SA (NYSE: ALU) is hoping to get a piece of this market in the future. Its recent product launch in the area, the 7750 edge router, climas to be five times as fast and 66% more power efficient than the typical core router.

This recent launch by Alcatel should concern Juniper the most. Cisco has a much more recognizable brand name and can leverage its size to reach markets faster with product diffusion. Juniper competes head on with Cisco in the majority of its segments, which has been adversely impacting the company. Juniper tumbled 6% earlier this week after being hit with a downgrade at Goldman Sachs, moving the stok form a "hold" to a "buy."

The big hinderance for Alcatel is the fact that its ten largest customers account for over 40% total revenues, with AT&T and Verizon making up 10% and 12%, respectively. What's more is that the majority of Alcatel's customers are telecommunications service providers, which leaves the company with vast "customer risk". 

Ericsson (NASDAQ: ERIC) is another major communications equipment company, one that is a market leader in the wireless equipment business (GSM-based -- a replacement for 1G analog networks). The company has been successful in recent years thanks to the growth of the wireless industry, especially in developing markets. Ericsson is also one of the underrated tech stocks that everyone should consider for an income portfolio (see all 5).

However, where Ciena is a turnaround story, I still think Ericsson trying to finding its place in the turnaround market. This includes Ericsson's recent attempt to monetize its IP portfolio by selling off patents.

Don't be fooled 

Ciena is a turnaround play in the telecom industry, but that of couse comes with some degree of risk. For example, volatility, the stock has a beta of 2.1, while its peers are much lower:  Juniper (1.8), Cisco (1.3) and Ericsson (1.4).  Even still, the allure of Ciena's exposure to the rapidly growing demand for bandwidth product portfolio make it an intriguing buy. Analysts expect the company to grow EPS at 15% annually over the next five years, not bad compared to Cisco's 8% (see why else Ciena is looking good).