Ceragon: Now Entering Bull Mode (Technical Analysis)

Intro

We wrote about Ceragon Networks Ltd. (NASDAQ:CRNT) roughly 14 months ago when shares were trading at roughly the $1.95 handle and couldn't seem to gain any type of upward traction. Although shares of Ceragon have returned just under 11% over the above-mentioned time frame (current price comes in at $2.16), these gains have only come in recent months due to a key technical breakout which we go through below.

As shown, the breaking of CRNT's downcycle trend line just a few months back (depicted rectangle) facilitated the bullish crossover of the stock's 10-week moving averages above its corresponding 40-week average. The breakout is the first step of this potential intermediate reversal pattern. Now, we need shares to test overhead resistance of approximately $2.80 a share before finally breaking out to complete the pattern at potentially over $4 a share (Well above what was offered for the company some months ago)

Suffice it to say, considering where CRNT shares are trading at presently ($2.16), an up-move past the $4 level would be a sizable move for the technology company irrespective of how long the move would take to materialize. This is the advantage of these patterns in that they have a definite price objective (height of the pattern). In saying this, we estimate that significant buying volume would not enter the fray here until that $2.80 resistance level is taken out (which essentially confirms the reversal pattern). Therefore, considering the microcap nature of this play, all positions initiated currently should incorporate strict size control.

Since the technicals of Ceragon are merely a summation of the company's technicals, it is encouraging to see bullish trends in CRNT regarding the trends of its gross margins, working capital as well as how forward-looking EPS expectations continue to gain momentum.

Gross Margin

Gross margin in Ceragon's recent first quarter came in at 33.8% which is a number that compares favorably with the 27.45% number back in Q1 of 2022 as well as the 33.05% trailing gross margin metric over the past four quarters. This bullish trend enabled Ceragon to report $4.7 million of operating profit for the quarter which ended up in the reporting of +$2 million in net profit for the quarter. Not only has gross margin been increasing from rising revenues particularly in North America (18% top-line increase in Q1 compared with the same period of 12 months prior), internal efficiencies continue to gain traction. The 5G rollout in North America continues to gather momentum especially considering that the 'rural' rollout in the US for example remains a high priority going forward. The adoption of 5G in India (which is the other key market for Ceragon regarding its growth curve) again is only in its initial innings, so we see plenty of potential here for management to keep on raising those margins especially if execution remains at an optimum.

Bullish Earnings Trends

Considering that Ceragon did not make any money last year, fiscal 2023 and beyond is expected to be a vast improvement with $0.23 per share being the bottom-line number predicted for this year followed by 47% expected EPS growth the following year ($0.34 per share). Revenue growth has obviously a big part to play here but as mentioned rising margins as well as bullish working capital trends are all playing into the growth story here and how EPS revisions have been changing for the better. For instance, Ceragon generated $3.5 million of operating cash flow in Q1 principally because of the company's return to profit and bullish inventory trends ($3.3 million improvement).

Suffice it to say, if the supply chain was an area of worry for the company, we would actually see inventory levels rising to ensure the company continued to have the wherewithal to keep customers serviced. Therefore, despite the fact that management maintained its top-line guidance of approximately $335 million for the fiscal year, we would not have been surprised if indeed guidance was raised accordingly. This premise stems from the company's growing backlog where demand remains strong along with the fact that Ceragon's supply-chain availability has actually been improving (which enables the company to execute on its backlog in a timely fashion). This really is the key in that if orders get filled quickly, we believe the market will have no choice but to price shares meaningfully higher here.

Risks

As alluded to above, Ceragon is a micro-cap stock (market cap of $181 million) which means traded volume is below average all things remaining equal. In fact, Ceragon's implied volatility at present comes in at 65% which means shares are 'expected' to trade between $0.75 & $3.54 per share over the next 12 months. This large range gives investors an idea of the risks involved. Furthermore, Ceragon's current 'IV-Rank' of 17 demonstrates that the 65% implied volatility number is actually lower than what this stock is normally accustomed to. Therefore, as alluded to above, until that $2.80 resistance level is taken out with conviction to confirm the bottom, all long positions here should be small in nature adopting strict risk management principles.

Conclusion

To sum up, the combination of Ceragon's bullish technicals along with how margins and profitability have been improving leads us to believe that shares should keep their bullish run going. Let's see if Q2 earnings can once surprise the upside. We look forward to continued coverage.