CRNT - Ceragon: Continue To See Strong Upside Potential In This Play (Technical Analysis)

2023-12-18 18:24:12 ET

Summary

• Ceragon's technical analysis shows a long-term basing pattern and consistent higher lows, indicating buyer accumulation.
• The breakout above the 200-day moving average and bullish trendline break suggest rising prices for Ceragon.
• Q3 trends show growth in sales, net profit, and operating cash flow, driven by strong demand in North America and India.

Intro

We wrote about Ceragon Networks Ltd. ( CRNT ) back in July of this year when we stamped a 'Buy' rating on the Israeli-based communications company. Reasons for our bullishness at the time were a bullish technical breakout, rising gross margins, and encouraging trends in both the company's earnings and cash flow numbers. Despite shares having fallen by just over 6% since that July commentary, we are reiterating our 'Buy' rating in Ceragon for the following reasons.

Technical Analysis

We have stated in previous commentary that shares of CRNT seem to be undergoing a long-term basing pattern that dates back to at least early 2022. However, if we span out Ceragon's technicals to a much longer timeframe, we see that shares have consistently been able to print higher lows since 2015. Higher long-term lows coupled with an overhead ceiling of technical resistance demonstrate buyer accumulation which is encouraging. Furthermore, the fact that shares in recent sessions regained their 10-month moving average once more is a positive sign from a bullish standpoint. Suffice it to say, despite the significant long-term resistance above Ceragon's prevailing share price ($2 per share approximately), even if Ceragon was only to test this resistance (not necessarily overcome it), this would still mean an up move to the $4 level approximately over time.

12-Month Technical Chart

Furthermore, on the near-term chart, the fact that shares of CRNT broke out above both their 200-day moving average as well as the depicted downcycle trendline should mean rising prices from this point. Furthermore, we also have a bullish trendline break in the OBV line (On Balance Volume) and an upside gap to boot. Bulls will now be hoping that shares do not fall below the $1.92 level (underside level of upside gap) as the longer this gap remains unfilled, the more confident we will become that rising prices are ahead for Ceragon.

Q3 Trends Point To Bullish Fundamentals

What we liked in Ceragon's first quarter was the sequential as well as the rolling quarter growth in sales, net profit as well as operating cash flow. What drove the financials forward in Q3 this year was top-line growth (almost 11% over Q3-2022) where sales surpassed $87 million. Demand was at its strongest in North America & India with these regions bringing in over 60% of the quarterly top-line take. Furthermore, management sees momentum continuing in these markets with telcos' ongoing investments in the 4G rollout remaining strong with 5G expansions also prevalent in certain areas of India.

In the US, Ceragon's bullish forward-looking fundamentals continue to be numerous and can be listed as the following.

1. The growing amount of projects (where fiber is not an option) that desperately need connectivity solutions. Management believes Ceragon's recent acquisition of Siklu can open up possibilities here with smaller carriers.
2. The Cincinnati multi-million multi-year contract is now effectively underway but management sees plenty of scope to expand on what has already been approved in this deal.
3. Ceragon's digital twin software solution has clear potential concerning the value it will able to add to customers through how network optimization will meaningfully improve.

Low Valuation Points To Strong Investment Case

Given Ceragon's bullish trend in both net earnings (+$7.7 million reported in net earnings over the first three quarters of this year) as well as operating cash flow, shares now trade with a forward GAAP multiple of 16.75 & trailing cash-flow multiple of 14.85. Furthermore, with Ceragon's sales (Trailing P/S of 0.51) & assets (Trailing P/B of 1.3), continuing to trade on the cheap (5-year averages of 0.73 & 1.47 respectively), everything is beginning to come together for Ceragon which should enable shares to begin to trade higher.

As long as the company can continue to report sufficient earnings (where positive generated cash flow comes as a result), then this very same cash flow can be used to keep growing the firm through investment, grow cash & shareholder equity, and bring down interest-bearing debt to boot. In fact, if one looks closely at Ceragon's financials, these trends have been taking place. Furthermore, with the company just off the back of three straight bottom-line beats and with further growth expected in fiscal 2024 as we see below, it is clear that Ceragon has momentum on its side.

Conclusion

To sum up, we are reiterating our 'Buy' rating in Ceragon due to its encouraging technicals, strong forward-looking fundamentals (especially in North America & India), growing profitability & keen valuation. Let's see what the fourth quarter brings. We look forward to continued coverage.

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