Finisar Corporation: Beaten Down, But Will Not Stay Down

Recently, I was asked to screen for some badly beaten stocks that are extremely oversold. I loved this assignment as the most profit can be made during times of extreme market panic.

I discovered Finisar (FNSR) which I really like. key points of why this is going to be a high alpha stock:

Increasing Revenues

Revenues increased $23.0 million, or 21.7%, to $128.7 million in the quarter ended August 3, 2008, compared to $105.7 million in the quarter ended July 29, 2007. This growth rate is twice that of JD Uniphase (JDSU).

New products

Several new products for testing 8 Gbps Fibre Channel, 3/6 Gbps SAS/SATA, and 10 Gbps Fibre Channel over Ethernet products being developed and used at OEM system manufacturers.

Increasing Profit Margins

The increase in adjusted gross profit margin was primarily due to a more favorable product mix resulting from increased sales of higher margin network performance test systems and optical subsystems for 10/40 Gbps applications, as well as cost efficiencies associated with higher shipment volumes.

Potential Short-Covering

FNSR has outstanding 5 1/4% convertible subordinated notes, in the principal amount of $92 million which are payable on October 15, 2008. The company has indicated that it intends to repay all the notes  and that its existing balances of cash, cash equivalents and short-term investments, together with the cash expected to be generated from future operations, will be sufficient to repay these notes and to meet cash needs for working capital and capital expenditures for at least the next 12 months. They also have a 50 million revolving line of credit from Silicon Valley Bank. Since the majority of the holders of convertible notes are short the stock to hedge their position, they will need to cover those shorts within the next month.

Guidance

FNSR has given very good guidance that forecast 15% better than any analyst following the stock. It is predicting sales of up to $167 million, which is well ahead of the $144 million average analyst estimate. FNSR has a forward P/E of 6 and trades at a mere 0.7x sales.

Risk / Reward

The down side risk is 10% at best with over 100% upside reward. 8 Analysts have price targets from $2 to $4. I'm a new Buyer at the current stock price of $1.10 and will continue to add to my position while the stock is under $1.25 / share.

FNSR is selling at bargain basement prices. And, I would not be surprised if a company like JDSU makes a bid to buy FNSR at 50% above this level. But, regardless of a takeover or not, the stock should do very well simply based on the fundamentals outlined above.

Disclosure: No postion in JDSU. Adding new position in FNSR.

Comments

[Ishortyou:]

thank you for the homework keep up the good job!!!

2008 Sep 17 11:00 AM

[jackooo:]

I have JDSU for ages. 7 years. It is good for long term. About 40 yrs.

2008 Sep 18 01:25 PM