A Promising Niche Wireless Player

08/06/2008 12:00 am EST

Focus: MARKETS

Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, rediscovers a company that supplies key products for wireless networks.

Ceragon Networks (Nasdaq: CRNT) is a small but critical player in the wireless broadband business. As the economy improves and as demand grows internationally, I expect that we will see shares do very well.

Ceragon develops transmission equipment for both wireline and wireless networks, but the company's real growth has been coming from its wireless business. Its products allow carriers to quickly accommodate their growth, expand their networks, and do it more cost effectively.

Ceragon is introducing a number of higher-margin products that will be rolled out throughout this year and into next. It is also cutting expenses, so I would now expect to see margin improvements.

[Also,] sales are picking up in emerging markets such as India and China. In the second quarter, Ceragon reported sales in Asia Pacific grew 92%—much higher than expected. This offset declining sales in the US (down 34% year over year) thanks to our economic slowdown.

Management expects this kind of growth to continue for the next two years or so thanks to its efforts to expand its networks and build additional capacity. Because of the strong demand in Asia Pacific, management has raised its guidance for the third quarter and expects a growth rate exceeding 35% for the year. The company believes that things will improve further in the US next year as carriers migrate to IP networks.

The company now trades below $8.00 per share. Ceragon has a strong balance sheet with $40.5 million in cash and no long-term debt.

On July 21st, Ceragon announced its second-quarter results. The company said it generated a net profit of $15.5 million, compared with $2.9 million for the corresponding quarter of 2007. Revenues [were] up 47% from the year-ago level.

The company expects sales to rise in 2008 to $220 million—up 36% over 2007. However, higher taxes and pressure on margins tempers the good sales growth—and will likely lead to earnings per share of about 55 cents.

The outlook for 2009, however, is much better. I expect the company to generate about $260 million in sales—a [conservative] growth rate of 18% from this year, and management says to expect 25% to 30% growth in revenues. I also think that the pressure on margins will ease as new products are introduced and we should see margins of about 35% in 2009.

Shares of CRNT currently trade at about nine times 2009 expected earnings per share. I think, however, that given the expected improving market for CRNT's products and improvements in sales and earnings per share growth, the shares should trade at 15x 2009 earnings. That would give a target price of $10.50 per share plus $2 per share in cash, or $12.50—an increase of 57% over the next 12 months.

I recommend buying shares of CRNT at current levels.

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