Drexel Hamilton Prefers Infinera Shares Over Oclaro, Lumentum In Optical Space

Drexel Hamilton prefers Infinera Corp. INFN over Oclaro, Inc. OCLR and Lumentum Holdings Inc LITE in the optical component supply space.

Oclaro

Lumentum

At Time Of Writing...

Analyst Greg Mesniaeff believes Infinera's top-line year-over-year growth will exceed 25 percent through 2017, as the company "leverages its superior competitive position and takes advantage of its growing earnings power."

Mesniaeff, who started coverage of Infinera shares with a Buy rating and a $22 price target, said photonic integrated circuit (PIC) gives Infinera a "significant cost advantage" over many of its peers.

Mesniaeff said PIC is "a proprietary component manufacturing process that yields superior optical and electrical transport capabilities at more attractive cost economics."

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In addition, the analyst noted that Infinera is "unique among its peers in that it lacks the burden of a legacy installed base of equipment tied to outdated technologies and standards such as SONET/SDH."

"We believe that the company continues to hold a defensible position in the market, and will likely enjoy this entry barrier for at least two more years," Mesniaeff wrote in a note to clients.

Although Infinera is "long viewed as a pure play on Long Haul Wave Division Multiplexing (WDM) optical transmission for telco carriers, the company has recently expanded into the Metro and Data Center (DCI) markets," the analyst added.

"According to industry researcher Infonetics, the market for metro optical transport now exceeds 50 percent of the entire $12 billion-plus optical transport market, and is poised to exceed $16 billion in 2020."

Meanwhile, the analyst initiated coverage of Oclaro with a Hold rating, citing "limited near-term upside for shares, which have appreciated by 53 percent year-to-date" and currently trades at 27x his 2017 estimate of $0.20.

However, the analyst believes that leading optical component suppliers like Oclaro are "currently well-positioned in the global optical transport market that Infonetics predicts will grow by over 8 percent a year to >$16 billion by 2020."

He continued, "The reasons for this are two-fold: (a.) Demand for 100Gb aggregation and interconnect infrastructure is accelerating among carriers, content providers, and data center interconnect (DCI) facilitators; (b.) System suppliers like Ciena Corporation CIEN, Alcatel Lucent SA (ADR) ALU, and Huawei continue to rely on older-vintage components limited by size, form factor, and power consumption limitations."

"We estimate that Oclaro will grow revenue by 13 percent in FY'16 and 18 percent in FY'17. Improving earnings leverage in FY'17 could drive additional multiple expansion, but the stock's recent price appreciation gives us reason to stay on the sidelines," Mesniaeff noted.

In addition, Mesniaeff started Lumentum Holdings with a Hold rating, saying "Given the recent run-up in share price, we are remaining on the sidelines until better visibility on the potential for upward estimate revisions is established."

Lumentum shares gained 21 percent year-to-date and currently trade at 17x his 2017 estimate of $1.56, the analyst added. Fundamentally, the analyst noted that the company is" currently seeing a strong tailwind from the 100G upgrade cycle in the carrier and data center interconnect (DCI) markets."

"LITE's revenue is highly-diversified globally, with 19 percent generated in the US, 14 percent in Mexico, 13 percent in Japan, 14 percent in Hong Kong and 16 percent in EMEA (FY'15). The high concentration of Asia-based revenue represents a significant risk factor for shares, we believe," Mesniaeff elaborated.

He added, "That notwithstanding, customer concentration remains high, with three >10 percent customers in 2Q, compared to two in the previous Q."

• Oclaro was seen down 1.55 percent at $5.17.
• Infinera was up 2.59 percent at $15.05.
• Lumentum was up 3.49 percent at $27.61.