Will an Upbeat Earnings Report From Finisar Buck This Negative Trend?

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When 2012 ended, there was a feel-good factor about optical networking stocks JDS Uniphase (NASDAQ: JDSU) and Finisar (NASDAQ: FNSR), both of whom I had expected would perform well this year. An uptick in telecom spending was supposed to be the primary catalyst behind the performance of both these companies, and Uniphase proved that the recovery is for real with a stellar quarterly report in January.

Uniphase’s management sounded quite positive about the industry’s prospects over the conference call, and the company’s decent outlook for the ongoing quarter indicated that the recovery isn’t a hoax. Uniphase has gained close to 4% so far this year, which doesn’t seem too handsome but is still better than Finisar’s predicament.

What’s wrong?

Finisar is down almost 13% this year, primarily due to a downgrade by Jefferies which flipped its rating on the stock to underperform. According to Jefferies analyst James Kisner, the availability of silicon-photonics technology, which would enable a higher rate of data transfer and make optical components obsolete, would knock the sails out of Finisar’s business.

Intel (NASDAQ: INTC) and Cisco are the pioneers of this technology. In January, Intel said that it is moving silicon photonics from the research and development phase to the open source phase. The chip giant says that this technology would help data centers generate better performance while cutting down on size and costs. This particular piece of news has probably thrown a wrench into the recovery of these two optical networkers as they have been on the slide ever since the concerns were raised.

However, as Needham analyst Alexander Henderson told Bloomberg, the deployment of the technology would affect just 6% of Finisar’s total business. Moreover, Kisner himself says that the timing of deployment, pricing, and adoption of the silicon photonics technology isn’t concrete yet. Hence, investors should consider adding to their Uniphase and Finisar long positions while they are experiencing weakness.

JDS Uniphase already gave us a glimpse of its potential in its last quarterly report. The company is expected to ride the build out of infrastructure for faster networks and data centers. Its cutting-edge products, such as the 4G LTE test solution, and upcoming solutions for data centers should help Uniphase post a better year.

What to expect for Finisar

Coming to Finisar, the company will be releasing its third-quarter results on Mar. 7. Analysts expect earnings of $0.16 per share on revenue of $238.4 million, and it shouldn’t be difficult for Finisar to satisfy them since it had called for an identical outlook when it last reported results. However, since telecom spending is expected to be in recovery mode, the outlook would hold center stage.

Ever since AT&T (NYSE: T) announced that it would be increasing its capital spending to enhance its wireless and wireline broadband networks, there wasn’t much doubt that optical networking stocks would start forecasting better. AT&T’s endeavor to cast its LTE net to 300 million customers by the end of 2014 is quite aggressive, since it would cover 99% of its customer base in 22 states. It would be spending $14 billion on this initiative over three years for deploying faster networks with total spending expected to be around $22 billion every year till 2015.

Hence, when Uniphase said that it’s expecting telco spending to get better this year, it became clear that even Finisar would probably be singing the same tune. But, Finisar has some added momentum. The company is turning around its business by upgrading its offerings, and turned in a better performance than Uniphase in the second quarter.

Finisar’s new products are finding traction as evidenced by design wins and market share gains. Also, the company’s datacom business, which supplies components for cloud infrastructure, should help it record further growth this year. Moreover, the presence of Cisco as a 10%-plus customer places Finisar in a good position to profit from the growth of data centers.    

The bottom line  

JDS Uniphase and Finisar have been quite unlucky so far this year. An uptick in telecom spending should have had a positive effect, but this hasn’t happened so far. Hopefully, a solid report from Finisar would bring about a positive change and this is quite possible since the company is making moves in the right direction to benefit from improved spending. Check back this space again in a few days to see how Finisar fared and what to expect from the stock for the rest of the year.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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