Strong Q4 Results Not Enough For Barclays To Become Constructive On Finisar

Shares of Finisar Corporation FNSR have gained more than 6 percent after strong fourth-quarter results, but Barclays maintains its Equal-Weight rating on the stock, saying it would "like to see some reasonable expectation of profit expansion before getting too excited about the stock or the sector."

The company's gross margin at 30.6 percent did exceed 30 percent guidance. Additionally, the 31 percent expected in the July quarter is higher than the Barclays' estimate of 30 percent.

However, the analyst remains cautious.

It's A Mixed Bag

"[D]espite the relatively strong revenue outlook, the shift to the new China facility near complete, the level of new product contribution in FY17 and the number of products that are capacity constrained, management commented that getting above 35 percent GM, let alone back to the 37 percent once achieved, is now a long-term project," analyst Joseph Wolf wrote in a note.

Related Link: Finisar Setting Up Strong Heading Into Earnings Release

Recent Movement And Looking Forward

"This leads us to believe that the industry remains highly competitive and without consolidation may remain profit constrained for the foreseeable future," Wolf added.

Some margin relief is bound to occur as revenues remain at or above current levels, but the analyst was expecting a "bigger snapback."

The shares were higher on the fourth-quarter beat and the strong sequential revenue guidance; the $333 million midpoint implies 6 percent quarter-over-quarter growth. Growth is expected in datacom and telecom with 100G driving datacom and WSS, 10G tunables and a ROADM pickup boosting telecom.

The company noted that multiple parts are capacity constrained, and component testing and employee training requirements are straining its ability to meet demand.

However, the analyst raised his price target by $3 to $20. Wolf also raised his EPS estimate for the fiscal year ending April 2017 to $1.31 from $1.18, while Street expects EPS of $1.20.

At the time of writing, shares of Finisar were up 6.43 percent at $18.71.