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This article is part of our Rising Star Portfolios series.
When management updated investors on some bad news this week and lowered earnings guidance, it looked as if the stock would be heading lower. Instead, it rallied 11%. Why?
A flood of news
The news quantified the impact of the severe flooding in Thailand earlier this year that shut down one of II-VI's suppliers. The Fabrinet (NYSE: FN ) plant located in Pathum Thani not only makes components the company uses, but it also sells products using II-VI components to other businesses. A double-whammy, if you will.
We now know this plant will be closed at least until 2012, and Fabrinet says it may never reopen at that location. II-VI says the related expenses will total about $0.01 to $0.02 per share in the current second quarter.
What's more, the company's Pacific Rare Specialty Metals & Chemicals subsidiary is seeing a "significant decline" in the market price for tellurium, which will probably lead to an inventory writedown of about $0.03 per share.
Management is now predicting second-quarter revenue in the range of$127 million to $129 million, and EPS of $0.17 to $0.19. For fiscal 2012, ending June 30, the guidance is for $550 million to $560 million in revenue and $1.05 to $1.10 in EPS. Compared with previous guidance, we're looking at about a 5% hit to revenue and a 17% to 36% drop in EPS.
Bullish bad news
With all this bad news, why did the stock spike 11%? Well, there's always the old saw that the market hates uncertainty, and when uncertainty clears up, stocks normally benefit. Investors now have a much clearer idea how Thailand will affect II-VI. It also helped that the market was feeling its oats yesterday on good news from Europe.
II-VI has taken us on a crazy ride, with wild swings both up and down. I expect more volatility in the future, but I'm trying to stay focused on the long term. There's quality competition out there from Cree (Nasdaq: CREE ) , Northrop Grumman (NYSE: NOC ) , Goodrich (NYSE: GR ) , and Dow Corning -- a jointly owned subsidiary of the deep-pocketed Dow Chemical (NYSE: DOW ) and Corning (NYSE: GLW ) .
However, as my buy report explains, II-VI has high barriers to entry; a sound, proven, long-term business model; and the possibility for strong growth in its target markets. I think current prices provide a good entry point -- so much so that I'm also making a CAPScall by giving the stock a green thumbs-up in my CAPS account.