This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature a pair of downgrades for document storage company Iron Mountain Incorporated (NYSE:IRM) and insulin treatments-equipment maker Insulet Corporation (NASDAQ:PODD). But the headlines aren’t all bad, so before we break the bad news to you, let’s start off on a bright note about…
Telecommunications equipment maker Ciena Corporation (NASDAQ:CIEN) stunned the skeptics Thursday with a surprisingly profitable Q2 earnings report. Expected to lose a penny a share, Ciena instead reported a $0.02 profit — and it beat on revenues, too.
Needless to say, Wall Street liked the report, and this morning, two analysts are hiking their expectations for the stock. Japan’s Nomura Securities is positing a $23 share price a year from now, impressed that “revenues finally beat expectations – expectations that were already at the high end of guidance.” Nomura’s also pleased to see that “the mid-point of Q3 guidance is 4% ahead of prior expectations and the high end of guidance 7% ahead.” Needham, meanwhile, points to calendar year 2013 guidance of $0.51 per share, and a potential double to $1 a share in profit in 2014, as justifying its own price target hike to $22.
If it hits that last target, we’re looking here at a company trading for less than 20 times earnings on near-100% earnings growth — at least in the short term. Longer-term, analysts expect to see Ciena Corporation (NASDAQ:CIEN) slow down to a more sustainable 16.5% pace of annual earnings growth. That’s certainly impressive, but to my mind… still not a good reason to buy the stock.
Why not? Well, consider this: 16.5% annual growth on $1 profits would be great, but right now analysts are only calling for 16.5% from currently negative profits. It’s hard to figure out precisely what that means, in terms of positive numbers.
Similarly, Ciena Corporation (NASDAQ:CIEN) turned in strongly positive free cash flow in Q2 — but remains free cash flow negative for the past year as a whole. Put it all together, and while Ciena Corporation (NASDAQ:CIEN)’s news this week is certainly good, it’s not quite as good as the headlines are suggesting.
All that is gold does not glitter — and Iron’s looking pretty dull, too
Turning now to the day’s downgrades, Iron Mountain Incorporated (NYSE:IRM) is going down like an avalanche on reports that the IRS is scrutinizing its plans to convert itself into a REIT, or real estate investment trust. (Seems IRS is skeptical of IRM’s assertion that its mountains of server-filled warehouses constitute “real estate.”)
