By now, I’m assuming you’ve heard about President Trump’s plan to jump-start the U.S. economy by spending $1 trillion on an “infrastructure plan.” You really should have heard of it by now… because he’s been promising it for about four straight years. But could 2020, with its arrival of a coronavirus and a recession that’s cost more than 40 million Americans their jobs, be the year that it finally happens?
Maybe.
In Rosenblatt’s latest report on the subject, analyst Ryan Koontz admits that there have been “years of infrastructure talk from all sides and surprisingly little to show for it.” But he also argues that passing an infrastructure bill, as an economic stimulus measure to get people back to work and help restart the economy, “makes sense” and is “broadly favored in public polling,” suggesting that 2020 could be the year there’s enough public support to get such a plan through Congress.
Moreover, the infrastructure bill now being mooted in the White House could be about more than just building roads and bridges. In addition to such steel-and-concrete projects, Koontz observes that the White House wants additional spending to accelerate the rollout of 5G wireless networks to form “a meaningful part in the bill.” If this comes to pass, then high-tech firms helping to build the 5G infrastructure could become major beneficiaries of a $1 trillion infrastructure plan.
Which high-tech companies in particular? Koontz identifies four likely targets: Ciena (CIEN), CommScope (COMM), Ericsson (ERIC), and Nokia (NOK).
In Koontz’s view, a $1 trillion infrastructure plan could begin accelerating spending on 5G infrastructure as early as next year, and increase spending by internet providers such as AT&T (T), Verizon (VZ), and T-Mobile (TMUS) by an average of 30% annually through 2023. This spending would flow to the infrastructure builders (Ciena, et al).
In 2020 the scenario Koontz describes, CommScope would probably be the biggest beneficiary in terms of revenue growth, growing its revenues collected from the big telcos by as much as 50% that year alone. Ciena would be second in line, growing revenues perhaps 42%, followed by Ericsson (30% revenue growth) and Nokia (25%). Other networking infrastructure companies such as Cisco (CSCO), Juniper (JNP), and Infineon (IFNNY) would benefit, too, albeit to a lesser extent.
As for which of these 5G infrastructure plays Rosenblatt likes best, Koontz leans towards Ciena, which he says has “strong exposure to hyperscale and 5G programs,” is the market leader in optical networking outside of China, and likely to win market share globally as non-Chinese telcos shun use of equipment manufacture by China’s Huawei has.
Koontz is also impressed with Ciena’s recent improvements in profitability. Indeed, over the past five years, operating profit margins at Ciena have more than doubled, from 5.5% to 12.4% (over the last 12 reported months). Applied to a 50% increase in annual revenue ($3.66 billion), this has led to an explosion in profits at Ciena, which topped $321 million over the past 12 months — versus just $12 million earned in 2015.
When you consider furthermore that Ciena’s free cash flow for the same period — $381 million — is running nearly 20% ahead of reported profits, it’s pretty clear why Koontz rates Ciena a “buy” alongside a $64 price target.
CIEN’s Strong Buy consensus rating is based on an impressive 12 Buy ratings indicating confidence in the stock. Only four analysts rated it a Hold. The average price target of $61 and change implies a 12.5% upside potential from the current share price of $65. (See CIEN stock-price forecast on TipRanks)
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