2 Stocks Set to Benefit From Higher Telco Spending This Year

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Optical networker JDS Uniphase (NASDAQ: JDSU) proved to be the pick of the industry in 2012, appreciating almost 30% even though telecom spending wasn’t in the best of health. In comparison, peer Finisar (NASDAQ: FNSR) started the year strongly like JDS Uniphase but gradually fell from grace as 2012 progressed, finishing the year almost 3% down.

Finisar Turning the Tables

However, there are indications that the tables may turn this year. Finisar has been fighting back impressively of late while JDS Uniphase has suddenly hit a roadblock. Finisar had beaten expectations handsomely in its last-reported quarter and also provided a decent outlook, while JDS Uniphase guided way below expectations. Moreover, Finisar’s revenue growth of 5.2% eclipsed Uniphase’s 1.2% by some distance, even though the optical networking market contracted 7.4% in the quarter.

Improving revenue in a contracting market indicates that Finisar is winning some market share, and an upbeat outlook suggests that better days lie ahead for the optical networker. Moreover, it is expected that telecom spending will rebound this year as carriers look to upgrade their networks.

For instance, the news that AT&T (NYSE: T) will boost its capex plans in the coming three years to $14 billion sent networking and communication equipment stocks soaring late last year. AT&T’s aggressive expansion of its faster networks might lead others to pump up their spending as well, and this bodes well for the likes of Finisar.

In addition, Finisar has been improving its product portfolio rapidly. Its Flexgrid WSS (Wavelength Selective Switch) products are ramping up well and have received good reviews from customers. Deployment of LTE networks is expected to drive growth of its wireless business further, while growth in cloud computing could provide impetus to its datacom business. Finisar counts networking giant Cisco as a 10%+ customer and hence, it is well-positioned to benefit from its client’s aggressive investments in the cloud.

Hence, keeping these factors in mind, it won’t be surprising if Finisar manages to turn its fortunes around this year.

JDS Uniphase is Still a Good Bet

But, it doesn’t mean investors should ignore JDS Uniphase either. Like Finisar, even Uniphase’s prospects will be brightened up by improvement in telecom spending. The company might have sounded out a very cautious outlook in its previous quarterly report, but it is one of the best optical networking stocks to play the data boom. Its unique 4G LTE test solution places it at an advantage over peers while its cutting-edge technology is another point to be kept in mind.

Its new products are finding good adoption rates, as they have been bringing in more than half of its core network revenue over the past year and a half. The company is engaged in a number of pilot projects for its PacketPortal solution, and it won’t be surprising if it successfully executes them, considering it had brought on six new customers onboard for this solution in the previous quarter.

JDS Uniphase also focuses on inorganic means to improve its business further, as evidenced by acquisitions of GenComm and Dyaptive last year. Hence, a strategic mix of organic and inorganic growth initiatives and a booming market for data and network equipment would probably help it improve going forward.

The Takeaway

After a mixed 2012, it seems carrier spending is set to improve this year and optical networkers Finisar and JDS Uniphase are well-positioned to benefit. Thus, it would be prudent for investors to take a look at these two stocks and benefit from the build out of faster networks and growth in cloud computing.

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