A Look At Finisar And The Communication Equipment Sector

by: StockRiters

Shares of communication equipment maker Finisar Corporation (NASDAQ:FNSR) rallied 6% on March 14, 2013, aided by news from both Spain and China. In the latter country, China Mobile (NYSE:CHL), the world's largest telecom service provider, forecast $30.6 billion capital expenditure in 2013. This represents a hefty 49% year-on-year increase, money that is necessary for building its 4G network. From Spain, the report was that Vodafone (NASDAQ:VOD) and France Telecom's (FTE) Orange together will invest $1.3 billion to build fiber optic broadband network there, despite the country going through a financial crisis. This is notwithstanding Vodafone writing off $23.8 billion due to southern Europe's financial troubles.

Finisar Corporation

Finisar is a global leader and one of the largest suppliers of optical communication components and subsystems and network performance test systems that enable data communications over local and storage area networks (LANs and SANs). The company's focus is on supplying optical subsystems for networking and storage equipment manufacturers that develop and market systems based on Gigabit Ethernet and Fiber Channel protocols. Finisar also develops novel laser diode transmitter technologies in the area of optics, packaging, control, and modulation.

Finisar announced financial results for its third fiscal quarter ended January 27, 2013. Q3 revenue stood at $238.4 million, which was 2.7% more than prior quarter. The growth was mostly due to sales of 10G and 100G transreceivers and transponders for computer network applications. Quarterly EPS was $0.09, which was almost 29% more that what the analysts expected.

Analysts expect the company to report a negative annual growth for the fiscal year ending April 2013. However, they expect it to grow more than 125% in 2014 and register a long term annual average growth rate of 11.25% in the next five years.

Recently Finisar announced that it had entered into an agreement with 3S PHOTONICS, a leading provider of innovative optical products and solutions for laser, sensor and telecommunication markets and instrumentation and integrated solutions for process and environmental monitoring systems. The agreement for development of new packaging platform for 980nm cooled laser pump modules stipulates that 3S PHOTONICS will be the exclusive supplier of the 980nm laser chips used for this platform, and Finisar will implement a manufacturing line based on this platform in its newly expanded facilities in Wuxi, China.

Finisar's Competitors

JDS Uniphase Corporation (JDSU) is a provider of communications test and measurement solutions, and optical products for telecommunications service providers, wireless operators, cable operators, network-equipment manufacturers and enterprises worldwide.

Oclaro, Inc. (NASDAQ:OCLR) provides optical communications and laser components, modules, and subsystems for telecommunications, industrial, scientific, consumer electronics, and medical markets worldwide. Its products include tunable laser, lithium niobate external modulators, pump laser chips, thin film filters, and amplifiers.

In its most recent quarter, JDSU reported revenues $429.40 million and a net income of $4.10 million, which translates into earnings per share of $0.12. Oclaro, on the other hand, reported a net loss of $12.22 million and a negative EPS of $0.35. JDS Uniphase is expected to grow at an average annual rate of 13.67% over five years.

The communications industry was among the most troubled industries in the technology sector during the 1990s. The industry experienced a turn round in the last decade riding on the intensive network building undertaken by domestic as well as overseas telecom service providers. The present slump in the industry is most due to stingy budgets of telecom providers and intense competition between makers of network equipment. The fate of the industry is thus arguably tied with that of the worldwide telecommunication industry.

China, which underwent deregulation of its telecommunication industry only recently, has proved to be a fertile ground for global communication equipment makers. The news of China Mobile's plans of expanding and upgrading its network holds a lot of promise for the hassled communication industry. Sooner or later similar expansions are likely to be announced by other emerging markets including India.

Investors in this industry need to keep a close eye on such news to understand the growth prospects of specific stocks. FNSR has a facility running in China, which puts the company at an advantage. However, FNSR stock is currently trading at almost 37% above its 52-week low despite having lost 6.31% YTD. It is apparently attractive for momentum players but investors looking at the long term need to consider that it is trading at an extremely high and unrealistic price-to-earnings ratio of 69.04. It will be a good idea to wait for a correction before buying.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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