Finisar, Ciena Downgraded: Why Morgan Stanley Is Turning Neutral On The Optical Companies

Optical component manufacturers present a bullish opportunity in 2019 but are less attractive investments in the near-term, according to Morgan Stanley.

The Analyst

Analyst Meta Marshall downgraded shares of Finisar Corporation FNSR from Overweight to Equal-weight and maintained a $20 price target. The analyst downgraded Ciena Corporation CIEN from Overweight to Equal-weight and raised the price target from $30 to $32.

The Thesis

Fewer short-term opportunities exist in the optical space following earnings releases, Marshall said in a Thursday note. (See the analyst's track record here.) 

Shares of Ciena and Finisar — which have jumped 25 percent and 35 percent, respectively, since upgrades in June and April — have closed the short-term valuation gap, the analyst said.

Cautious On Ciena Guidance 

The earnings growth potential that Ciena possesses was evident in its Q3 results, which showed earnings outperformance driven by both the top line and gross margins, Marshall said. 

While Ciena has a decent Q4 setup, the analyst is cautious concerning elevated expectations for 2019 guidance.

"We think it is more likely that CIEN gives themselves some room in their guide, creating little chance of positive revisions until [the company is] past the next earnings report." 

Few Catalysts For Finisar Before 2019

Finisar was able to show progress on 3-D revenues, margins and operating expenditure control, all of which Morgan Stanley views as levers for improving earnings power and, in turn, valuation.

This has led to a continuous positive rerating of shares, Marshall said. 

Further incremental confidence in Finisar's earnings power would necessitate the Sherman facility being qualified and meaningful revenue from new datacom products, the analyst said. 

"While we think both stocks could continue to move toward our bull cases, we think those catalysts for further positive moves are in CY19, causing us to move to the sidelines for now." 

The Price Action

Finisar shares were slipping 2.69 percent to $19.16 at the time of publication Thursday, while Ciena shares were down 1.17 percent at $31.27. 

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