Bull of the Day: Finisar (FNSR)

Finisar (FNSR) saw a big tumble in its stock on October 24, a day after AT&T reported earnings. Since that time, analysts have increased estimates helping push FNSR to a Zacks Rank #1 (Strong Buy). It is the Bull of the Day.

Lower CapEx Guidance from Ma Bell

Nearly the entire fiber optic industry had a dimmer switched lowered on their stock prices on October 24. AT&T reported earnings and after increasing CapEx spending in the 3rd quarter, analysts questioned if that rate would continue.

Reports that the telecom giant would not spend as much sent its smaller suppliers tumbling lower. Of course this needs to be put into perspective, which is what analysts have done in recent weeks, but investors might have missed.

Company Description

Finisar makes optical subsystems and components for data communication and telecommunication applications. The company's optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables. Finisar was founded in 1987 and is headquartered in Sunnyvale, California.

Can You Hear the Guidance Now?

It should be noted AT&T is not the only important teleco that requires assistance from fiber optics companies like FNSR. Verizon is also a major player and their CapEx guidance at the end of the second quarter was very positive.

A simple search of the AT&T conference call transcript reveals the truth of what was said versus how it was interpreted. The CFO stated 'we are not trying to limit CapEx spending by a standard compared to last year.'

He went on to say 'I think we said in the past that we would expect the CapEx for this year to be in $21 billion range and for '14 and '15 to be in the $20 billion range and at this time we are not adjusting that or changing that.' So while CapEx may be shrinking, it's not as much as you may have believed. It's also not so likely that this means a 5% cut across the board and fiber could even see an increase in CapEx.

FNSR Sees Estimates Moving Higher

Prior to guiding the July 2013 quarter higher, estimates were already showing a positive trend line. The Zacks Consensus Estimate called for $0.62 in May, and that bumped higher to $0.72 in June. In August the company noted that they expected earnings to be better than expected, causing the consensus to rise once again to $0.86.

Following the most recent earnings report, estimates launched higher again. First to $1.06 and they currently at $1.09. This is the type of consistent growth in estimates that make the 'P' go higher in the PE calculation.

Valuation

The valuation of FNSR looks very attractive. While the trailing PE is well ahead of the industry average, the forward PE of 21x is right in line with it. More conservative measures like the price to book multiple and the price to sales multiple each show FNSR trading at a multiple that is less than half the industry average. As analysts continue to move estimates higher, the valuation will only become more attractive unless the stock vaults well above the recent 52 week high.

The Chart

Instead of the normal yearlong chart, I thought a 3 month for FNSR would better tell the tale of what is going on here. The jolt higher at the start of the chart came when the company increased guidance in early August. The stock trended higher over the course of the next few months reaching a 52 week high of more than $26 in late October. Then the bottom fell out follow the AT&T guidance. This pull back is allowing investors to get in at a good price on a stock that is seeing consistent positive earnings estimate revisions.

Conference Call quotes are courtesy of SeekingAlpha.com

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.

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