Jefferies Is Bullish On Opticals, Oclaro A Natural Target For Finisar

Jefferies is bullish on Finisar Corporation FNSR, Oclaro, Inc. OCLR and Lumentum Holdings Inc LITE and said Oclaro offers the most potential upside among all the three optical component companies as it's still seen as a natural target for Finisar.

The sector is set to benefit from carrier investments in 100G around the world, China network upgrade and emerging 3D sensing opportunity.

Finisar Upgrade

Analyst James Kisner upgraded Finisar to Buy and raised the price target to $34.

“We believe that the recent soft results and guidance and weakness in FNSR shares stem from a technical product issue that will likely be resolved shortly and concerns around China where we are confident longer-term demand trends will be strong,” Kisner wrote in a note.

M&A Case For Oclaro

Meanwhile, Kisner reiterated his Buy rating and $14 target price on Oclaro, saying the company is a natural target for Finisar. A potential acquisition is expected to boost Finisar’s EPS by 23 percent.

Kisner believes the Finisar-Oclaro combo makes sense due to:

1) “There are significant sales force and R&D synergies – about we estimate roughly 1/3 of FNSR’s revenue overlaps with 2/3 of OCLR revenue”; and

2) “An acquisition of OCLR would significantly improve Finisar’s presence and capabilities in the long haul telecom optics/discretes space.”

“We believe a potential acquisition by FNSR at a 40% EV premium ($10.76) could result in FNSR shares appreciating to 12x our estimate of combined FNSR/OCLR earnings power of $3.19; this would in turn drive OCLR shares even higher to $13.50, providing another path to our $14 PT for OCLR shares,” Kisner highlighted.

Finisar may do a large acquisition given CEO Jerry Rawls’ comments on the recent third quarter call and the recent $575 million convertible debt raise.

Oclaro also has major secular growth drivers including Metro 100G, China, and Data Center Interconnect, and 100G client optics.

Lumentum’s 3D Sensing Opportunity

Kisner also raised the price target on Lumentum shares to $56, saying the 3D sensing opportunity is not fully priced in to shares.

The analyst expects 3D Sensing revenue to hit $460 million in CY2018 and gross margin expected to reach 36.2 percent. Lumentum is working with several handset OEMs for 3D sensing applications and has begun shipping units for revenue.

Kisner also projects upside from carrier investments in 100G and sees hyperscale upgrades to drive QSFP28 upgrades.

Meanwhile, CEO Alan Lowe stated he could imagine "quarters of a $100 plus million type of marketplace growing to over $1 billion."

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