CRNT - Ceragon Networks: A Top Pick For 2024

2024-01-19 15:22:42 ET

Summary

• Ceragon’s thesis rests on growing the business, buy-out potential, geopolitical tensions with China, insider alignment with other owners, and low valuations.
• The company produced strong operating results in 2023 and has locked in a large contract win to start 2024.
• Margins have historically been weak and need to improve as the company attempts to grow.
• CRNT is a small cap, is headquartered in a current conflict zone, and the stock may need to consolidate or correct after the most recent rally.

Introduction

Ceragon Networks Ltd. ( CRNT ) is a play on 5G and other communication technologies, generating wireless products and services that support wireless and cellular service providers. It is based in Israel, listed in the US, and does business around the globe. In the third quarter , for example, India accounted for 34% of sales and North America made up 26%. The remainder was split between Latin America, Europe, Asia-Pacific, and Africa. The stock benefits from a variety of positive attributes, the firm had a strong 2023, and it is positioned to do well in 2024. For full disclosure, we first took a position in the name in late 2022, and have added to it since, with an average purchase price of $1.89.

Investment Thesis

The Corporation is in Growth Mode

In the latest quarter, revenues clocked in at $87.3 million versus $78.6 million in the comparable period last year. The bottom line grew from -$0.9 million to $3.4 million, and cash flows from operations were up. According to data compiled by Seeking Alpha , this performance exceeded analyst estimates.

In December , the company completed the acquisition of privately held Siklu for an enterprise value of $15 million. Siklu provides wireless fiber connectivity products and will expand CRNT’s product offering, especially to small service providers and private network customers. The deal is expected to increase 2024 revenue between $25 million and $29 million as well as improve margins.

Ceragon has also started 2024 on the right foot, signing a $150 million deal with an Indian customer to modernize and update their network. Work will begin in the middle of this year and the deployment is projected to take roughly two years. The final value of this agreement could increase or decrease by a quarter depending on how the roll-out unfolds.

Management recently announced that full-year 2023 results will hit the high end of its previous forecast and that revenues should expand another 14% in 2024. The full-year operating margins should be at least 10%, while profits and cash flows should climb compared to 2023. By 2027, CRNT’s executive team hopes to generate annual sales of $500 million and increase gross margins to a range between 34% and 36%.

CRNT is an Attractive Acquisition Target

In addition to potential capital appreciation, the entity could be acquired. Aviat Networks ( AVNW ) twice attempted a tie-up in 2022, first at $2.80 in cash and then at $3.08 in cash. Nothing came of these attempts, but the rationale for a merger is compelling. By purchasing CRNT, a competitor could add a growing revenue stream to its own business, take a lot of costs out of the combined entity, and boost its bottom line substantially in the process. Therefore, it is possible that Aviat or another peer pursues Ceragon again in the future.

It Benefits from Geopolitical Tensions

Ceragon may also benefit from geopolitical tensions with Huawei and China. The Chinese enterprise is one of their main competitors and faces a host of sanctions, restrictions, and bans. The tensions between the west and China will likely continue into the future and should benefit Huawei’s western peers – including Ceragon.

According to the corporation’s latest presentation. Huawei is a main competitor in the best-of-breed segment and Ceragon is capturing market share.

Insiders Have Skin in the Game

Ceragon Network has a high degree of alignment between insiders and other owners. According to the latest 20-F , the insiders own 9.94%. This means that the board and executive team have skin in the game and their personal fortunes are tied to those of other shareholders.

Valuations Are Low

Despite the strong operating results in 2023 and recent rally, the shares are still cheap. According to Seeking Alpha , the ticker is relatively inexpensive versus the index or the sector, and it is trading at or below its 5-year average on a variety of metrics.

If CRNT can continue to grow and improve its profitability, valuations should move higher. This may explain why the Seeking Alpha analyst community rates Ceragon as a buy, while Wall Street has the name as a strong buy, and the quant rating here on Seeking Alpha is ranked as a strong buy.

Risks

The Growth Strategy Carries Risks

Though the growth has been impressive, and the outlook is good, there could be potential issues that come with it. Historically, the company has had low margins; if this continues and the margins do not improve as hoped, the stock could languish.

M&A integration or overpaying are risks as well. While the recent purchase of Siklu appears to have closed smoothly and represented a small bolt-on deal, Ceragon now has to integrate and capture the potential benefits. Going forward, management must avoid falling into the trap of making larger and larger offers where the risks of failing to integrate, realize synergies, or overpaying go up.

Ceragon currently (and historically) has had a clean balance sheet with low debt, ample cash, and a solid current ratio. It has not escaped dilution however, as it has tried to grow, with the share count having inched higher in the past few years. The sales per share and earnings per share have increased at a faster rate, but it would be better for owners if there was no dilution at all. In the future, dilution may continue as management attempts to fund its organic expansion or make acquisitions.

It is Headquartered in Israel

The company is based in Israel which is also home to its administrative, R&D, and operational departments. For some investors, exposure to a conflict zone may be a turnoff given the surprise nature of Hamas ’ original attacks, the humanitarian crisis in Gaza, and the spread of conflict throughout the region. It should be noted, though, that the hostilities have not impacted the business thus far, and nearly all the organization’s sales occur outside the country. Moreover, at some point the conflict will subside and economic activity throughout the Middle East should return to normal.

The Momentum Could Turn and the Market Cap is Low

Ceragon is a small cap at around $220 million, making it much smaller than most competitors, and has recently had a strong rally. In October 2023, the ticker bottomed around $1.56 and has powered higher since. It would not be surprising to see the symbol tread water or correct before moving up again.

Conclusion

Ceragon Networks is a solid pick for 2024. The financial results in 2023 were great, the company has landed a $150 million contract to start the New Year, and the outlook for 2024 builds upon last year’s success. In addition to this growth, the thesis rests on low valuations, insider alignment with other owners, buyout potential, and geopolitical tensions with Huawei. This said, the expansion strategy is not without risks. Margins have been weak historically and if that continues the stock could do poorly. It is based in Israel, is a small cap, and after the latest rally the shares may be due for a correction or pause.

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