Today, we’re going to look at five networking stocks. The idea behind this article is to illustrate the wide variations existing in the performance of small to mid cap companies in this highly competitive niche.
First up is JDS Uniphase Corporation (JDSU), a mid cap with trailing twelve month gross revenues of $1.8 billion and a return on equity of 7.25%. Priced at $10.28 with a price to book of 2.4, it is one of the stronger companies in the mix we examine today. It has a modest net income per employee of $14,320. Contrast this with Spirent Communications Plc. (SPMYY) which has a net income per employee of $57,551 and a return on equity of 21.62%.
Spirent, also a mid-cap, with less than one-third the staff of rival JDS Uniphase Corporation and has trailing twelve month gross revenues of just over $515 million. SPMYY stock trades at $7.95 and boasts a price to book of 3.09. Now here’s the kicker…Spirent’s net income exceeds that of JDSU by $13 million, yet JDSU has three times the gross revenue Spirent generated in the same time frame! Past income statements reveal that JDS may invest substantially more in research and development than rival Spirent. This may signal that JDS is a better bet, long term. It may also explain the disparity in net income to gross revenues.
Moving on to Fabrinet (FN), we have a small cap trading at $12.25 with a price to book of 1.79. Fabrinet’s trailing twelve month gross revenues are just below $95 million and each employee contributes $9,498 to net income. Challenger, Oplink Communications, Inc. (OPLK), counters with trailing twelve month gross revenues of $198.8 million and net income per employee of $13,591.
Guess which firm has the best return on equity? Wrong! It’s Fabrinet with a return on equity of 24.11% compared to Oplink’s very respectable but lower 18.70%. You see, no single fundamental will ever reveal the full scope of a company’s potential investment value. Fabrinet’s price to book is1.79 and for Oplink, 1.17 and most of the other fundamental statistics are similar, leaving me in favor of Fabrinet.
Did any of you have money in Opta Corporation (OPTX.PK)? Looks like this dog won’t hunt anymore. Any assets will likely be lost to MPEG LA, LLC’s lawsuit citing its breach of patent portfolio license contracts with MPEG LA. Close competitor, Aviat Networks, Inc. (AVNW), could be headed in a negative direction as well. This company, trading at $1.93, posted a hefty loss, earning -$1.54 per share.
It has a negative return on equity of 26.67%. Aviat is restructuring, disposing of NetBoss and WiMAX. It showed a significant reduction in losses for the first fiscal quarter (2012). It has substantial cash-on-hand and should be able to pull through and reap the rewards of its revised business strategy. If you are not faint of heart, this might be a stock to consider given a price to book of 0.66.
Moving right along, Finisar Corporation (FNSR), trading at $17.51, is in the black with trailing twelve month earnings of $79.39 million. Each of its 8065 employees pushed $9,844 to the bottom line. The company also enjoys an impressive return on equity of 14.36%. The analysts seem to like Finisar too, being more or less equally divided between buy and strong buy.
With a price to book of 2.20 and shares trading at less than one-half the 52 week high, Finistar looks like an opportunity we shouldn’t pass up. Many reports suggest that Thailand’s recent flooding problems will hurt JDSU and give Finisar an opportunity to enhance its customer base. Contrast this with F5 Networks, Inc. (FFIV), trading at $99.64 at this writing. Trailing twelve month earnings stand at $222.02 million which translates to net earnings per employee of $94,597.
FFIV’s return on equity is an eye-popping 21.08%. Price to book is 6.15 and the stock is trading at about 75% of its 52 week high. Analysts aren’t quite as keen on this one, with the buy or hold crowd outnumbering the strong buy group more than 3 to 1. I like both FFIV and FNSR, but if I had to choose, I would pick FNSR because it has the earmarks of a value stock.
We turn our attention now to Oclaro, Inc. (OCLR) which is trading at $3.46 after posting a loss of $46.42 million in the trailing twelve months. Shares are near their 52 week low of $3.09. On November 9th, Oclaro will announce its 1st quarter fiscal 2012 results. Even though the balance sheet is awash in red ink, revenues are on the rise.
Oclara is forecast to be in negative revenue territory until fiscal year 2013 at which time they are expected to begin showing us some black ink. If you are confident in this industry and find the forecast credible, Oclara is a good buy. The analysts’ are evenly split between strong buy and hold which tells me they are either enthusiastic or lukewarm with few having an intermediate opinion. This brings us to Infinera Corporation (INFN) a small cap that is bleeding out.
Infinera experienced trailing twelve month losses of $65.13 million. Infinera recently announced their prototype for a 500 gigabyte optical transport system. This has the potential to breathe new life into the company if it is all they say it is. Infinera impresses me by way of their commitment to research and development. They have made year over year increases in the face of enormous pressures. Even if you admire the “gutsy” management, Infinera is still a gamble, especially when you consider that the current share price of $7.07 is 63% of its 52 week high, couple that with a price to book of 1.90 and my knees start to get a little weak.
No one would disagree that exploding network traffic will drive demand in this sector for sometime to come. The industry is exceedingly competitive and profitability is driven by research and development. To remain competitive, a company must have the capital to reinvest or land a high profile contract like EMCORE Corporation (EMKR). In short, these companies are a real roller coaster ride. If you enjoy the thrills, go for it!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.