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Last week I wrote about Finisar (FNSR) and gathered it would be smart for JDS Uniphase (JDSU) to buy/merge with them. This weekend I spoke with a source that read my article and works in the sector. He asked me to take a look at Bookham (BKHM) as another acquisition target in the same space. Although I am not sure of it, he believes an offer around $2 per share is on the way. 

So after taking a look, here is what I have found. BKHM is in the same sector as FNSR but failed to rally on Friday along with the herd. I dug deep but couldn't find any reason for the stock price to be so cheap. First of all, BKHM has big clients such as Ciena (CIEN), which uses BKHM's products. This is a testament to the quality of BKHM's products. Second, looking at the balance sheet, BKHM stands out with ZERO debt and trades below book value of $1.49, which makes it more of a value play than others in the group. Finally, BKHM is hugely undervalued, trading with a Forward P/E of 18 and just 0.4x sales with a growth rate of 39%. The growth rate is almost four times that of JDSU and twice that of FNSR, which was my favorite in the group. But now, BKHM, at the current stock price of $1.18, is far too good of a bargain to pass up. 

My source could be correct that BKHM is a takeover candidate with $50 million cash on hand, debt free and just 101MM shares outstanding. Some players in this space could easily offer 2x book, or about $3 a share. Regardless if a buyout comes or not, it's an excellent buy now.

Six analysts cover BKHM and have targets from $2 to $4. The most recent analyst is Paul Bonenfant at Morgan Keegan, who started coverage on 7/16/2008 with an Outperform rating and $3 target. Bonenfant said the company continues to benefit from an expanding customer base and timing of new product introductions. At the time he initiated coverage, BKHM was trading at around $1.70 per share, which is nearly 45% above the current price.   

Last week BKHM opened at $1.46 a share, hit a high of $1.52, then sold off with the market. But it didn't recover. It would be crazy to be selling at this price and not loading up on this. I hope readers took my FNSR advice with a 27% gain currently. I will roll half my profits into BKHM and look forward to the ride.

Disclosure: Long FNSR. No position in JDSU/CIEN. Adding new position in BKHM.

Source: Bookham Looks Too Good to Pass Up