2013 is Shaping Up as a Turnaround Year for Finisar
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On the surface of it, things at telecommunication-equipment provider Finisar (NASDAQ: FNSR) are not great. Finisar's fiscal second-quarter earnings, reported on Dec. 5, fell 95% from the same quarter a year earlier. In addition, investors have taken a hit, with the stock down about 20% this year.
As the second-largest fiber optic equipment maker behind JDS Uniphase (NASDAQ: JDSU), Finisar has seen its bottom line weaken over a stretch of quarters going back to March 2011 amid soft demand from some of its customers. However, Finisar appears to be turning the corner of what has been a disappointing 2012, and deserves a second look from investors.
For one thing, in Q2 the company met expectations on revenues and beat expectations on earnings per share. That might not be saying much, but sales showed improvement when compared to the fiscal first quarter. While it’s true that Finisar has been playing second fiddle to JDS Uniphase for some time, according to a Dec. 3 investor analysis report from Needham, Finisar is “arguably the best positioned company in the optical components market.”
Finisar makes optical subsystems and components that connect short-distance local area networks (LANs) and storage area network (SANs), as well as longer distance metropolitan area networks (MANs) and wide area networks (WANs). The company is the largest player in enterprise optical connectivity, with the highest market share in SANs, was first to market with a 16G SAN product, and has the largest market share in 10G enterprise products.
According to Needham, where Finisar really stands to gain is on the LAN side of the business, as "the enterprise is likely to shift to optical connectivity as the scale out of enterprise data centers driven by consolidation and virtualization drives increasing demand for faster and longer reach connectivity." The company is the strongest in the critical Wavelength Selective Switch (WSS) component arena, with their industry-leading Liquid Crystal on Silicon (LCoS) technology. While several key customers have in the past preferred JDS Uniphase's AON Super Transport Blade instead of the LCoS offering, over the past couple of years Finisar has been working on full line cards to compete with JDSU rather than just selling the WSS module.
When it comes to operating margins (a weak spot for Finisar), the company’s operating margins are currently at 5%-7%, but should recapture their historic double-digit operating margins during 2013 and continuing into 2014. That's why earlier this month Needham upgraded Finisar to buy from hold, with a price target of $18 a share.
If ever there was a time to make a play in the telecom equipment market, it is now with Finisar. With capex on the rise and Finisar’s new products ramping up in 2013, it’s looking like a turnaround story in the making.
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