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Alliance Fiber Optic Products (AFOP - Snapshot Report) was
profiled back on August 2, and the stock is up 45% since
then. The ride isn't over for this fiber optic play and it
is again the Bull of the Day as a Zacks Rank #2
More Broadband Required
Back in July I wrote about my "Best Tech Stocks For 2nd
Half of 2013" and I discussed the idea of more devices
coming soon and how they will create demand for more
bandwidth. To satiate the demand for that bandwidth, service
providers are increasingly turning to fiber optics.
Over the last few weeks companies that service the fiber
optic market have been on fire. Ciena (CIEN) recently
beat earnings and guided higher pushing its stock higher by
14% and Finisar (FNSR) reported
earnings which they had previously revised guidance for, and
then came out with another increase in guidance.
AFOP designs and manufactures components, modules, and
subsystems that empower dynamic optical network, and
facilitates the migration of fiber optics from the long haul
through the last mile. That is all industry jargon for they
make a fiber optic connection to your business or home a
The most recent quarter was viewed by Wall Street as a beat
of two cents. Zacks has the quarter and the one before it as
The main idea with a company the size of AFOP is to look at
revenue growth. Recently, the company increased its revenue
guidance for the next quarter from a range of $19M-$20M to
more than $22M. The chart below shows how expectations for
revenue have grown throughout this year.
Stock Split & More Shares
The company recently split its stock 2 for 1. Some investors
like when this happens as the stock appears to be "cheaper".
Savvy investors understand that the split is a mathematical
equations that does nothing to the valuation of the stock or
the amount of dollars invested in the stock before the spilt.
The end result of a split like this is that there are more
shares, and thus the divisor in the EPS equation requires
more net income to move the needle in a meaningful way.
The Company is holding a special shareholder meeting on
October 21, 2013. The purpose of the Special Meeting is to
consider and to vote on three proposals. One of the proposals
is to increase the number of shares of authorized Common
Stock from 20,000,000 to 100,000,000 shares. This move will
cause some dilution to shareholders, but it will also make
the stock much more attractive to the institutions that would
make an investment, but are fearful of the current
concentration of shares. Right now, only 31% of the stock is
held by institutions and greater availability of shares
should serve to push that metric higher.
Earnings Estimates Adjusted
In March the Zacks Consensus Estimate for 2013 was calling
for $0.49. The number bumped up to $0.53 in April and was
again raised to $0.66 in May. Analysts went on vacation in
June, as the consensus didn't change, but they really kicked
estimates higher following earnings in July. The consensus
now stands at $0.86. That means earnings estimates have
increased by 71% since March.
Estimates in the paragraph above were adjusted from the most
recent profile of AFOP as Bull of the Day due to the stock
Since the last time I profiled AFOP as the Bull of the Day,
the valuation has move higher. But when you consider that
the stock moved up by 45%, you have to expect the valuation
metrics to move higher. The forward PE moved from 18.6x to
26.6x while the industry average has held still at roughly
20x the next twelve months earnings. Price to sales also
jumped from 5x to 7.4x and again the industry average has
held still. For the most part, the valuation story is moving
higher, but its not out of control expense at this point.
The price and consensus chart for AFOP shows how the earnings
movements have helped push the stock higher. The chart has
not updated the prior estimates to reflect the recent stock
split. So for the chart I thought I would show where it was
when I last profiled the stock. You can see from this Google
chart that the stock has performed quite well. I expect this
ride to continue.
Brian Bolan is a Stock Strategist
for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor
service, a Buy and Hold service where he recommends the
stocks in the portfolio.
Brian is also the editor of Breakout Growth
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