Barclays Negative On Optical, Downgrades Finisar, Lumentum

• Finisar Corporation FNSR shares are up 16 percent since October 8, while shares of Lumentum Holdings Inc LITE have surged 35 percent.
• Barclays’ Joseph Wolf downgraded Finisar from Overweight to Equal-Weight, and Lumentum from Equal-Weight to Underweight.
• Investors are likely to prefer value stocks over growth stocks, Wolf stated.

For the US emerging technologies segment, 2015 was a tough year. The median stock declined 21 percent, as compared to a 1 percent drop in the S&P 500. Analyst Joseph Wolf said that this does not necessarily mean that stocks are cheap.

Wolf has a Neutral view on the group, and cited a “mixed outlook for various end markets.” He believes that a “selective approach focused on value and company-specific growth/catalyst stories will perform best in 2016 given the environment and valuations.”

Balance sheets were healthy, which could result in an “outsized focus” on M&A and share repurchases.

Finisar

Wolf said that the downgrade reflected a more negative stance on the optical sector, with slowing growth rates and stiff competition. “We believe that investors should not be too excited by the seasonal uptick in 3Q and 4Q and while metro could be a driver in telecom we do not think it is enough to support double-digit growth or significant margin expansion.”

Finisar’s shares were under pressure through 2015 on account of the company’s flat revenue performance, competitive threats in datacom and telecom as well as margin concerns. This may not change dramatically in 2016, Wolf commented.

The price target has been reduced from $18 to $17.

Lumentum

While the near-term environment appears favorable for Lumentum in 2016, this already seems to be reflected in the stock, following the jump over the past three months. “Our main concern is that optimism surrounding the opportunity in telecom is at its peak and that following the next few quarters, we do not have a clear line of sight on a next leg for growth,” Wolf wrote.

Optical Communications GM could remain under pressure in the foreseeable future, due to competition, and most of the projected annual expansion could come from growth in the Commercial Lasers business. The analyst believes that valuation is “full,” taking into account both growth and competition.

The price target is at $19.

In the report Barclays noted, “We continue to believe that FNSR should outperform LITE, and warrants a higher multiple than LITE given datacom growth, but we understand why near-term dynamics, i.e., strong telecom segment performance, would boost LITE’s multiple.”