We expect network upgrades to accelerate in [the first half of 2007] relative to [the second half of 2006] and see ADC, ECI and JDSU as prime beneficiaries. Optical technology is also increasingly prolifering in enterprise networks and Finisar is the leading component vendor here. While we are positive on the optical equipment space generally, our proprietary scorecard points to components vendors Finisar and JDSU as the most attractive investments in the sector.
Some company specific observations from Genovese:
- Finisar: Gross margins look set to improve from current levels and these is significant operating leverage in the vertically integrated model…Finisar has over 50% share in datacome or enterprise optical components and is the leading maker of “pluggable” optical modules. The industry shift from discrete components to optical modules is gaining steam in service provider telecom markets thereby opening up significant new market opportunities…Target price: $5
- ADC: As a leading maker of fiber and copper connectivity gear, which we think of as “closet organizers” for the large amount of cabling associated with FTTx [fiber to the home/curb/node] deployments, ADC is a good play on global service provider FTTx growth…While investors are concerned about [second half 2006] FTTx spending in North America and Europe, we a see a strong recovery in [the first half of 2007]. We think fiber connectivity spending at Verizon (NYSE:VZ), AT&T (NYSE:T), BellSouth (BLS) and DT [Deutsche Telekom] as a group will increase approximately 60% from [the second half of this year to the first half of 2007] as opposed to a typical roughly 10% seasonal decline…Target price: $18.
- ECI Telecom: ECI is positioned in three of the most attractive, highest growth segments of next-gen telecom networks (FTTx access, metro optical and edge routing), all vital to IPTV architectures. We see 14% CAGR [compound annual growth] in ECI’s TAM [total addressable market] from ‘05-’09…Target Price: $11.
In today’s trading:
- Finisar is up 9 cents to $3.74.
- ADC is up 57 cents to $15.18.
- ECI is up 31 cents to $8.29.
- JDSU is up 6 cents to $2.24.