Please ensure Javascript is enabled for purposes of website accessibility

Is Oclaro, Inc. a Buy?

By Anders Bylund - Updated Feb 27, 2018 at 12:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The maker of optical networking components is exploring the bottom of a cyclical trough right now.

2017 was a tough year for optical networking specialist Oclaro (OCLR). The maker of fiber-optic networking components saw share prices slide 25% lower despite rising sales, surging cash flows, and a clean slate of positive earnings surprises.

Following that head-scratcher, early 2018 has been a roller coaster. Oclaro's stock dipped 16% lower just before the company reported second-quarter results, then made it all back thanks to another solid report. All told, the stock is up 5% year to date, in line with the stock market in general.

If you picked up some Oclaro shares at an even deeper discount in late January or early February, you've already booked something like a 20% gain in three weeks. But Oclaro still looks like a buy at today's prices.

A bundle of fiber-optic cables, lit up in white against a black backdrop.

Image source: Getty Images.

What's wrong with Oclaro?

Some Oclaro investors worry about slow orders from China, in the middle of a difficult changeover from 40-gigabit modules to the new 100-gigabit product generation. Oclaro was caught off guard by extremely high demand for the faster solution in 2017, and the company has been limited by its ability to manufacture lasers and networking modules for the 100G generation quickly enough to fill incoming orders.

Both of these issues should be temporary.

Oclaro already reported a short-lived order uptick from China in the second quarter, triggered by inventory management around the Lunar New Year. More to the point, management expects demand from the Middle Kingdom to start building in the second half of this calendar year. The product mix for that expected surge includes a significant amount of lower-speed modules, relieving some of the pressure to deliver tons of newer and faster products in a hurry.

On an even higher level, there is no doubt in my mind that high-speed optical networking tools won't go out of fashion anytime soon. It's true that wireless networking has taken the world by storm over the last decade, but even there, cell towers need to connect back to the internet backbone by the fastest and most cost-effective means possible. That means fiber-optic cables.

The upcoming switch to 5G cellular data networks will only increase the need for robust fiber connections, since each 5G tower will support both faster and more numerous data links than the aging 4G standard.

A large charting arrow making a hop, step, and jump onto a trampoline, then skyrocketing.

Image source: Getty Images.

The upshot: Oclaro will bounce back

The only thing stopping Oclaro from making a full recovery would be if the company ran out of money before figuring out the Chinese market and the next-generation manufacturing issues. That's unlikely to happen, since Oclaro generates positive (and growing) free cash flow and EBITDA profits.

In the meantime, you can take advantage of the market's cautious view of Oclaro by locking in some attractive share prices.

Oclaro stock is trading at just 8.8 times trailing earnings today, among the lowest ratios the shares have ever seen. At the same time, the company sports sector-leading profit margins and earnings growth. Long story short: Oclaro is a steal at current prices.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Oclaro, Inc. Stock Quote
Oclaro, Inc.
OCLR

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.