CIENA Chart - Future Expectations, indebtness, and raising interest payments

Quick look at Ciena (CIEN).
This stock appears to be rolling over, the MACD looks like it will cross this week, if it can't hold the 0 level, it could indicate longer term trend change to bearish.  The Slow stoch also shows a roll over and If you plan on buying this stock it would only make sense to wait until the Slow Stoch is back closer to the 20 level.  However, My expectations are that the stock will head back to the 200 MA which should be closer to the $20 mark. This level corresponds to a pivot high in May 2010 as well so should be decent resistance.  This means close to 20% drop in the stock over the next couple of months, especially if the markets roll over which they appear they might be again.

While the US has been shook by S&P credit watch, I look at highly leveraged companies such as CIENA as at the whim of debt markets.

Here are some ratios to be worried about.  These are from Reuters.

Financial Strength

	Company	Industry	Sector	S&P 500
Quick Ratio (MRQ)	2.42	1.72	1.57	0.68
Current Ratio (MRQ)	2.99	2.07	2.63	1.00
LT Debt to Equity (MRQ)	1,516.52	20.42	14.36	113.76
Total Debt to Equity (MRQ)	1,516.52	30.62	39.19	161.87
Interest Coverage (TTM)	-74.37	2.32	0.60	17.35

I question the LT DEBT to Equity as it appears extremely high however, I do know that Ciena on all accounts is much more indebted than competitors.  With Ciena's acquisition of Nortel's MEN division required substantial debt instruments to fund it (mainly convertible notes).

A couple of interesting parts from the Annual report (2010).

Outstanding indebtedness under our convertible notes may adversely affect our business.

     At October 31, 2010, indebtedness on our outstanding convertible notes totaled approximately $1.4 billion in aggregate principal. Our indebtedness could have important negative consequences, including:

	•		increasing our vulnerability to adverse economic and industry conditions;
	•		limiting our ability to obtain additional financing, particularly in light of unfavorable conditions in the credit markets;
	•		reducing the availability of cash resources for other purposes, including capital expenditures;
	•		limiting our flexibility in planning for, or reacting to, changes in our business and the markets in which we compete; and
	•		placing us at a possible competitive disadvantage to competitors that have better access to capital resources.

     We may also add additional indebtedness such as equipment loans, working capital lines of credit and other long-term debt. 

Below is the interest payments per quarter from Q1 2009 up to Q1 2011.  Remember that the MEN acquisition occurred officially in Q1 or Q2 2010, hence an increase in Debt payments.  The trend, however based on 9 quarters, is troubling especially with the above warnings included above from the company.  

Mainly this point should be highlighted:

"Limiting our ability to obtain additional financing, particularly in light of unfavorable conditions in the credit markets"

  

Lastly, I note found in Ciena's Annual report (2010) which is a failed logical flow.

Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business, operating results and stock price.

     Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report a report containing management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal controls are effective. Compliance with these requirements has resulted in, and is likely to continue to result in, significant costs and the commitment of time and operational resources. Changes in our business, including the MEN Acquisition, will necessitate modifications to our internal control systems, processes and information systems. Our increased global operations and expansion into new regions could pose additional challenges to our internal control systems. We cannot be certain that our current design for internal control over financial reporting, or any additional changes to be made during fiscal 2011, will be sufficient to enable management to determine that our internal controls are effective for any period, or on an ongoing basis. If we are unable to assert that our internal controls over financial reporting are effective, our business may be harmed. Market perception of our financial condition and the trading price of our stock may be adversely affected, and customer perception of our business may suffer.

Assertion 1: Failure to maintain effective controls over financial reporting could have material consequences

Assertion 2: Compliance to Section 404 of the Sarbanes-Oxley Act of 2002, costs the company time and money

Assertion 3: Business changes and the acquisition of Nortel's MEN will require changes (posing additional challenges) to internal controls

Assertion 4: Management doubts current design for internal controls will be sufficient to enable management to determine internal controls are effective for "any period"

Assertion 5: If they cannot assert that the internal controls are effective, the business maybe harmed

Assertion 6: Market perception of the financial condition may be adversely affected (stock price drop).

A1 -> create a need for effective controls

A2 -> a complaint that adhering to the law will cost the company money

A3 -> an admission that internal controls do in fact require a change

A4 -> an admission that the current internal controls cannot be trusted as they may not be effective over "any period"

A5, A6 -> This indicates that just lacking the ability to assert that their controls are effect will harm business leading to a stock correction / financial difficulty.

Very convoluted way of saying that they really don't know if their projections can be trusted and admitting that this will hurt them at some point.