Please ensure Javascript is enabled for purposes of website accessibility

Why Finisar Remains a Solid Buy

By Harsh Chauhan – Feb 24, 2014 at 1:30PM

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

Strength in various end markets and data growth should help Finisar perform well in 2014.

Fiber optics components supplier Finisar (FNSR) took a heavy beating in November last year after its key customer, Cisco (CSCO -0.35%), trimmed its revenue guidance. Cisco had accounted for 17% of Finisar's revenue in fiscal 2013, which is why a weak outlook from the networking bellwether was enough to send Finisar shares lower. However, Finisar's second-quarter results proved that there is more to it than just Cisco.

A sizzling performance
Finisar's second-quarter results topped estimates. Revenue was up 25% over the prior-year period as Finisar saw strength in both of its end markets -- telecom and datacom. Net income showed a massive improvement from $271,000 in the year-ago quarter to $30 million in the previous quarter. 

Finisar now expects revenue of $290 million to $305 million in the third quarter, ahead of the consensus estimate of $290 million. On earnings, the company is looking at $0.43 to $0.47 per share, while analysts expected $0.38 per share. A look at Finisar's robust performance and terrific outlook makes Cisco's troubles look like a mutually exclusive event.

Diversification helps
Given that Cisco made up close to a fifth of Finisar's top line last fiscal year, the networking giant's trimming of its three-to-five-year revenue growth target from 5%-7% to 3%-6% should have pulled Finisar down.  

Cisco is facing some tough times due to a difficult economic environment and the recent government shutdown. Additionally, Reuters reports that Cisco's fortunes in the emerging markets are now shaky after the recent surveillance allegations, since most of the data is transmitted through Cisco's equipment. Also, Cisco is reportedly facing political backlash in China. But Finisar seems to be negotiating Cisco's weakness quite well due to its diversified customer base. 

Finisar has a wide range of customers, including Ciena (CIEN 0.14%), Alcatel-Lucent, Huawei, Nokia-Siemens, and others. Most of its customers are key players in the telecom and networking infrastructure industry. That's helped Finisar enjoy good growth in both its end markets.

For example, Ciena opens Finisar's access to both domestic and international service providers. Ciena is a key supplier to AT&T and Verizon in the U.S., and it has also been expanding its network internationally. Ciena recently inked a global partnership with Vodafone, while also landing Tier 1 customer wins in emerging markets such as Brazil and India. In addition, Ciena will be upgrading the broadband network of Cablevision Argentina.  

Ciena finished its last fiscal year with a backlog of more than $1 billion on the back of key customer wins. If Finisar sees weak business from Cisco, it can make up for it with better business from other clients such as Ciena.

Also, Finisar seems to be winning share from peer JDS Uniphase. Uniphase cited poor telecom demand in the previous quarter, due to weak orders from North American customers. On the other hand, Finisar has recorded growth in this business due to impressive product-development moves. The company started delivering a record number of new products to its customers in the previous quarter while Uniphase seems to be struggling.

Datacom's outperformance continues
The datacom business has been progressing quite well for some time. In the previous quarter, datacom revenue was up close to 11%, sequentially, as Finisar saw strong demand for 10G products and Ethernet switches. Looking ahead, Finisar is quite optimistic about the performance of this business and expects the growing complexity of data centers to aid growth.  

Infonetics reports that there are more than 500,000 data centers across the globe. As these data centers expand in size, Finisar will aim to grab higher optical content in them. Additionally, according to TechNavio, global data center construction is expected to grow at a compound annual rate of 15.8% through 2016. Since Finisar counts most of the important networking and infrastructure companies as clients, it seems well-positioned to benefit from the growing data-center market.

The bottom line
Finisar put in a strong performance in 2013. It appreciated close to 40%, but there could be more upside in store in the future as its prospects look strong. At a forward P/E of 14 and a PEG ratio of 0.54, investors who still haven't bought in to this growth story should definitely consider scooping up some shares.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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

Finisar Stock Quote
Cisco Systems Stock Quote
Cisco Systems
$48.40 (-0.35%) $0.17
Ciena Stock Quote
$44.11 (0.14%) $0.06

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

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.