It has been whispered for the last couple weeks that an increase in capital expenditures (CAPEX) for future benefits from large tech and telecom related companies would benefit telecom equipment and other optical component companies. However, markets have been slow to react as the companies set to benefit have yet to raise guidance or announce earnings. But on Thursday we got our first hint of what’s to come when JDS Uniphase Corp (NASDAQ:JDSU) and Ericsson (ADR) (NASDAQ:ERIC) announced earnings. And now, all stocks in the space are trading higher.
Ericsson and JDS Uniphase Crush Expectations
Ericsson and JDS Uniphase provided the most impressive earning reports of the day on Thursday. Both operate in spaces that had seen very little momentum over the last year as large companies have cut back on costs in the U.S. due to uncertainty. However, earnings and guidance suggest otherwise, and that maybe this is now the space to own.
JDSU Uniphase beat expectations by a significant margin on both the top and bottom line. The stock then rallied over 18%, mostly due to underperformance during the last year. More importantly than its earnings was its guidance, and individual segment performance. The company’s guidance was slightly above consensus but after disappointing and conservative guidance in recent quarters investors were pleased that it showed signs of improvement. The company saw a near flat year-over-year telecom test/measurement sales which were better than the 8.5% drop last quarter. Its optical component sales rose 12.7% and lasers rose over 20%. Overall these results bode well for the industry.
On the other hand, Ericsson showed very strong gains, with 5% growth in sales due to a 51% jump in North America. The strong North American performance was due to LTE build-outs from U.S. carriers and also stronger demand in Japan. These results continue to add to the notion that earnings for other companies scheduled to report earnings in coming weeks could be good in the mobile infrastructure space.
Where to Look Next
So which telecom/communications equipment companies might benefit most? Obviously, the first choice would have to be Finisar Corporation (NASDAQ:FNSR). The company has a very similar business model to JDS Uniphase. The stock has suffered as of late due to fears of increased competition from companies such as Intel and Cisco. It has been reported that both large companies are entering the 100G silicon photonics business, therefore with Finisar trading cheaper and demand showing a boost, it’s very possible that it could rally.
Another company to benefit from increased CAPEX spending is a small cap stock Oclaro, Inc. (NASDAQ:OCLR) . The stock rallied 9% on Thursday after earnings from JDS Uniphase due to it sharing a similar optical component structure and business model. The theory is that Oclaro should also see a boost in demand if it’s occurring throughout the industry.
Lastly, Alcatel Lucent SA (ADR) (NYSE:ALU) traded higher by 6.50% on Thursday, and is perhaps the most diversified in the business. I believe that Alcatel is best positioned to benefit because it’s AT&T’s largest equipment supplier and AT&T has already announced significant increases in CAPEX spending. The majority of Ericsson and JDSU’s growth came from America; therefore investors should be optimistic for the outlook of Alcatel. Furthermore, the stock is the cheapest of the bunch, with a price/sales of under 0.20.
Whether strong demand and solid earnings is an industry wide occurrence or is simply a company related strength, the entire space is trading higher on Thursday. This is a space that is fairly valued due to assumed weakness, and it’s this presumed weakness that is now creating gains with an increase in demand. As a result, I suggest a long hard look at this space, because it’s very possible that you’ll find value within.
The problem with playing the end of year CAPEX dump angle right now is that it is a trailing indicator.
The Q in question is long over, and we are currently in the next Q (1Q), were there is no CAPEX dump. Indeed, quite the opposite could be true. So by buying on the end of year CAPEX theory, the run up may only hold up until the Q is announced on Feb. 7th. After that, the stock might very well start trading on the expectations of 1Q, which is for a significant loss.
Of course, if you are long and patient, none of this matters. You can buy now, and hope to fulfill your expectations of the stock in a year or two.
Unfortunately, for many at this board, being long and patient means anywhere from 1 to 2 days.
rumors wries: "... Also, I think Huawei led the world in 2008 patent applications, and was 2nd in 2009. ..."
rumors - interesting and surprising. Do you have any source for that? Are you referring to applications in China or U.S or world-wide or ....
P.21 of the lender presentation has a nice statistic on patents of ALU ad 16 major competitor. This statistic makes Huawei's patent portfolio look insignificant and qualitatvely inferior in the industry .. but I am not sure what you are referring to.
The real surprise Q on the upside will be the Q1/2013... obvs. ending in black. IMO
Just take a look at the contracts ALU cloased abroad : Middle East and Africa,
Sowth America, Russia, Europe eather,
Takover bid not excluded...:)
Not at all. The fact is that investor/short are pounding in ERIC / ALU for carrier spending and ALU lost.If 4Q number are good, it show that ALU is not a broken company and deserve a look.
Why when the number are bad, short crucify the company, but when it 's good they just brush aside.
I am certainly not going to sell regardless what the 4Q number is. I've seen ALU at 90c , I also seen it 5$. I disagree that buying now is buying the past. CAPEX 2013 - 2015 are significantly higher than 2012.Of course, it's always seasonal, but the expectation are already factor in.
Sure. you can be skeptical, you can be short, but please do not try to misled other.