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Bull of the Day: Finisar Corp (FNSR)

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Upgrade cycles have large impacts on suppliers, and today’s Zacks Bull of the Day, Finisar Corp. (FNSR - Free Report) is in the midst of two big ones.  Currently, China is in the middle stages of their fiber optical 100G upgrade cycle, and North America is in the beginning stages up the same metro cycle upgrade.  During the early stages of this upgrade cycle, Finisar has posted record revenues and margins have improved by more than 200 basis points.  

This Zacks Rank #1 (Strong Buy) company is a provider of fiber optic subsystems and network test and monitoring systems which enable high-speed data communications over local area networks, or LANs, storage area networks, or SANs, and metropolitan access networks, or MANs. They are focused on the application of digital fiber optics to provide aline of high-performance, reliable, value-added optical subsystems for data networking and storage equipment manufacturers.

Recent Earnings

Finisar reported Q1 17 earnings in the early part of September where they beat both the Zacks Consensus Earnings and Revenue estimates for the second consecutive quarter (they have beaten the earnings estimates for four consecutive quarters).  The company saw year over year gains in the following; Revenues +7.1%, Operating income +100%, Net income +83.2%, and operating margins increased from +4.4% to +8.3%.  On a quarterly basis, the company saw gains in the following; Sales of telecom products +29%, Sales of Datacom products +0.2%, and GAAP gross margins rose to +31.7% from +28.4% last quarter.  

Management’s Take

According to Jerry Rawls, CEO, “I am pleased to announce that Finisar achieved record revenues for our first quarter of $341.3 million, an increase of $22.5 million, or 7.1% compared to the prior quarter. This growth was primarily driven by strong demand for 100Gb/s transceivers in CFP, CFP2, CFP4, and QSFP28 form factors. In addition, demand for wavelength selective switches was strong. Our gross margins improved significantly due to favorable product mix and leverage of our vertically integrated manufacturing infrastructure over the larger volume. The combination of revenues being at the higher end of our guidance range and better than expected gross margins resulted in earnings per fully diluted share exceeding the upper end of our guidance range.”

Price and Earnings Consensus Graph

As you can see from the graph below, both earnings estimates, and the stock price have risen significantly in the second half of 2016.

FINISAR CORP Price and Consensus

FINISAR CORP Price and Consensus | FINISAR CORP Quote

Increasing Estimates

Due to the strong quarterly results and future growth expectations estimates for Q2 17, Q3 17, FY 17 and FY 18 have all seen significant upgrades over the past 30 days; Q2 17 improved from $0.21 to $0.38, Q3 17 rose from $0.21 to $0.38, FY 17 jumped up from $0.85 to $1.39, and FY 18 improved from $0.99 to $1.62.

Bottom Line

Over the past two quarters, revenues have more than doubled due a few reasons; China is in the middle stages of their 100G optical metro upgrade cycle with continued growth expected through 2017.  North America is now in the beginning stages of their metro upgrade with companies like Verizon boosting their 100G capability. Lastly, Finisar has enhanced their product mix, and margins have steadily improved over the past two quarters.

Now, which stocks should you sell?

As a Zacks Rank #1 Strong Buy, this Bull of the Day deserves consideration. But today there are 220 Zacks Rank #5 Strong Sells that demand even more urgent attention. If any of these are lurking in your portfolio, they should be removed immediately. Since 1988, such stocks have actually performed more than 11X worse than the S&P 500. See all Zacks Strong Sells and Strong Buys absolutely free >>.

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