Analysts See 4 Fiber Optic Technology Winners as China Heats Up

November 17, 2017 by Lee Jackson

Even though the optical arena is huge when it comes to data transmission, big data centers, and many more applications, much of the demand for the top companies comes from China. And when China slows down, they all tend to slow down. While the worst may not be quite over, the bottom may be close, and that’s the time when more aggressive accounts need to look hard at the sector, especially with the potential for an upturn in 2018.

A new Stifel research report makes the case that while some of the top companies have come in light, and the forward guidance is below estimates, the analysts feel that the China issues may become less and less of an obstacle. The firm has four optical companies rated Buy, and all could be great additions to aggressive accounts.

Fabrinet

This is one of the top companies still riding the wave of enterprise data center growth. Fabrinet Inc. (NYSE: FN) is a leading provider of advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and subsystems, industrial lasers and sensors.

Fabrinet offers a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, advanced packaging, integration, final assembly and test. Fabrinet focuses on production of high-complexity products, in any mix and any volume.

The Stifel price target for the shares is $40, and the Wall Street consensus target is $42.67. The shares traded early Friday at $32.00.

Finisar

This stock was hit hard recently and may be offering a very good entry point for investors. Finisar Corp. (NASDAQ: FNSR) provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China and elsewhere. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers and servers used in wireline networks, as well as the antennas and base stations used in wireless networks.

The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers and photodetectors for data communication and telecommunication
applications, as well as passive optical components for telecommunication applications.

Stifel has a $27 price target, and the consensus target is $29.10. The shares traded at $18.50 Friday morning.

Lumentum

This top company looks to benefit big-time from the Microsoft Azure project. Lumentum Holdings Inc. (NASDAQ: LITE) is a provider of optical and photonic products for a range of end market applications, including data communications and telecommunications networking, as well as commercial lasers for manufacturing, inspection and life-science applications.

The company operates in two segments. OpComms segment products include a range of components, modules and subsystems to support and maintain customers in its two primary markets: telecom and datacom. Products from its Commercial Lasers segment serve customers in markets and applications, such as manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining, such as drilling in printed circuit boards, wafer singulation and solar cell scribing.

The $75 Stifel price target compares with the $72 consensus estimate and the recent $57.55 a share price.

Oclaro

This smaller capitalization company may offer big upside potential. Oclaro Inc. (NASDAQ: OCLR) designs, manufactures and markets lasers and optical components, modules and subsystems for the optical communications, industrial and consumer laser markets worldwide.

The company’s products generate, detect, combine and separate light signals in optical communications networks. It offers client-side transceivers, including pluggable transceivers; line side transceivers; tunable laser transmitters, such as discrete lasers and co-packaged laser modulators; lithium niobate modulators to manipulate the phase or the amplitude of an optical signal; transponder modules for transmitter and receiver functions; and discrete lasers and receivers for metro and long-haul applications.

Stifel has set its price target at $10. The consensus target is $9.58, and shares were last seen trading at $6.35.

While the optical sector is not out of the woods, it may be very close. All these companies are solid pure-plays and make good buys at current trading levels. When China demand picks up, so will the prospects for these well-run companies.

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