The Technology SPDR (XLK) was down 0.8% last week, including a 3.4% cumulative drop on Thursday and Friday. Within the group, the telecommunications equipment group was up strongly on the back of strong quarter reports from Finisar Corp. (FNSR) and Ciena Corp. (CIEN), while most other groups were weak falling 5% or more last week. This article covers our analysis of the big news and price moves in the technology products group last week, evaluating them for buy and sell ideas.
Sell Finisar Corporation (FNSR): FNSR is a provider of optical subsystems and components that are used to interconnect equipment in short-distance local area networks (LANs), storage area networks (SANs), longer distance metropolitan area networks (MANs), fiber-to-the-home networks, cable television networks, and wide area networks. The stock went up 20.2% last week, half of it on Friday after the company reported its July quarter on Thursday after the market closed.
Specifically, FNSR beat earnings estimates (21c versus 18c) for the July quarter, and it expressed optimism that telecom spending will rise up going forward, and that the inventory correction that has plagued optical component firms was over. However, revenue was in-line, and the company also guided revenue and earnings in-line for the October quarter. Furthermore, the 21c in earnings reported for the July quarter fell 32% year-over-year, and was down 36% sequentially from the prior April quarter.
We would sell FNSR into any rally into the mid-$20s. At Friday’s closing price of $20.21, it trades at a fair 22 times FY April 2012 earnings, and at 14 times FY April 2013 earnings. While the company looks like a turn-around and maybe a good long-term bet for the optical sector, it is unlikely that it will cut through significantly above the 200-day moving average in the mid-$20s based on current valuation, falling earnings and a tepid beat in the current quarter. It is more likely that investors will wait another quarter or two to confirm the turnaround in fundamentals before jumping in.
Buy Oclaro Inc. (OCLR): OCLR manufactures transmitters, modulators, receiver, transceivers, laser chips and amplifiers used in optical networks. The stock was up 27.1% last week, in sympathy with the positive earnings report from optical peers CIEN and FNSR, and emerging optimism that telecom spending will rise going forward and that the inventory correction that plagued the sector is over.
OCLR has recently reported a string of disappointing quarters, with the most recent June quarter coming in at a loss of 21c versus a 9c loss in the March quarter and a 19c profit in the year-ago quarter. The stock, consequently, has plummeted since its recent high in the $19 range in February, falling as low as $3.23 last month. OCLR is projected by analysts to earn 43c in the FY ending June 2013, and as such it seems like a bargain at current forward 10 P/E and a possible turnaround in the sector.
Furthermore, technically, it seems that it has finished correcting to the downside, after having struck what appears like a long-term bottom last month in the $3-4 range. Furthermore, the stock traded recently in February at $19 when quarterly earnings were in the 12-15c average range, indicating that its forward P/E of 10 is at the bottom of its historic trading range.
We would be buyers of a small position here, and accumulate more on any corrections as long as the long-term outlook for the optical sector looks to be improving going forward.
Ciena Corp. (CIEN): CIEN is a designer of Ethernet transport and switching systems used in network infrastructure by telecom and cable service providers. The stock was up 27.8% last week, most of it ahead of a strong July quarter report issued before the market opened last Thursday. CIEN thrashed earnings estimates (8c profit versus 9c loss) while missing revenue estimates ($435 million versus $444 million) for the July quarter, and guided down revenue for the October quarter ($440-$460 million versus $475 million).
At Friday’s close of $13.78, CIEN trades at a fair 17-18 times forward P/E for FY 2012. The stock is priced for leadership and strong earnings improvement, yet it is unclear based on the company guiding down in the current and recent prior quarters if that turnaround is real.
We have a bullish bias on CIEN based on the current strong quarter, but would wait on the sidelines for now until that strength can be confirmed with another strong quarter report or further raised guidance.
JDS Uniphase Corp. (JDSU): JDSU is a provider of communications test and measurement solutions, and optical products to telecommunications service providers, cable operators, and network equipment manufacturers. The stock was up 14.2% last week, based on positive reports from optical peers CIEN and FNSR, as well as persistent rumors that Cisco Systems Inc. (CSCO) had a buyout interest in the company.
At Friday’s close of $12.78, JDSU trades at a reasonable 12 forward P/E, while earnings are projected to rise modestly from 93c in 2011 to $1.05 in 2013. Analysts have a mean $17 target on the company, and of the fifteen analysts that cover the company, nine rate it at buy/strong buy, five at hold, and one rates it at sell.
Buy Magma Design Automation (LAVA): LAVA develops electronic design automation software for integrated circuits used in telecom, computing, and networking applications. The stock was up 17.7% last week, after falling 16.0% the prior Friday when it reacted to a mixed report for the July quarter. The company missed revenue estimates ($35.3 million versus $36.4 million), while earnings were in-line; looking forward, it guided earnings for the October quarter at 8c-9c versus 9c estimate and revenue at $37.5-38.0 million versus $38.2 million estimate, and it guided FY 2012 earnings at 38c-40c versus 39c estimate and revenue at $158-160 million versus the $159 million estimates.
We believe that LAVA is a good buy at current prices. At Friday’s closing price of $5.18, the stock trades at 9-10 forward P/E, at the bottom of its historic range, while earnings are projected to rise at 40% compounded growth rate from 28c in 2011 to 54c in 2012. Furthermore, entire electronic design automation (EDA) sector is strong right now on the back of strong product cycles; for example, earnings at its small-cap peer PDF Solutions (PDFS) are projected to increase from 28c in 2010 to 70c in 2012, and earnings at its large-cap rival Ansys Inc (ANSS) are projected to increase from $2.13 in 2010 to $2.80 in 2012.
Furthermore, the slight revenue miss in the July quarter was mainly due to slippage of an order for the company’s yield management software into the next quarter, without which revenues for the quarter would have been at the high end of its guidance.
LTX-Credence Corp. (LTXC): LTXC manufactures test equipment used in the fabrication of ICs for wireless, computing, automotive and consumer markets. The stock was down 10.4% last week, most of it on Wednesday after the company reported that it missed earnings (27c versus 28c) and revenue ($62.7 million versus $65.7 million) for the July quarter, and guided down October quarter to a very weak $35-$39 million in revenue (versus $64.9 million estimate) and 10c to 6c loss (versus 26c earnings).
We believe that shares are likely to stay weak in the interim given the disastrous guidance for the October quarter. However, based on the information the company presented in the earnings conference call, it guided down for the October quarter due to a slowing down of the growth plan of its customers and not on account of any order cancellations or push-outs.
As such, it appears that the fundamentals of its business in terms of the demand for its products, the resulting revenue stream and cash flows are still intact. Hence, it is likely that the current quarter negative guidance may just be a blip and not indicative of a trend or a weakening of competitive positioning. We would neither be buyers nor sellers here.
Table (click to enlarge):
Please note that the cumulative price change referred to in the last column of the table above is used here as a measure of volatility to determine big movers in the group. It equals the sum of the absolute value of the change in daily prices. So, for example, if a security had price moves of 2%, -3%, 4%, -6% and 1% during the five days of the week, the cumulative price change during the week would be the sum of the absolute values of the daily price changes, which in this case would be 16%.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.