Buy These 3 Issues On NeoPhotonics Dip, Says MKM Partners

MKM Partners recommended that investors buy shares of Finisar Corporation FNSR, Oclaro, Inc. OCLR and Lumentum Holdings Inc LITE following the weakness induced by the negative pre-announcement from NeoPhotonics Corp NPTN.

Pre-Announcement

Shares of Finisar, Oclaro and Lumentum were hit after NeoPhotonics cut its fourth-quarter revenue and trimmed margin guidance on fab yield issues related to recent capacity expansions in its High Speed products line.

Although NeoPhotonics was very clear that the issue is 100 percent company specific, investors remained cautious on the sector. The brokerage said NeoPhotonics’ latest problem with fab yields that cropped up in the fourth quarter will likely continue through first half of 2017.

In the call, NeoPhotonics noted there could be up to a two-quarter lag in Chinese demand between new phase 12 tenders expected at the end of first quarter and additional 30 percent increased orders (above phase 11 volumes) by the end of third quarter.

Analyst's Reaction

However, analyst Michael Genovese reiterated his Buy ratings on Finisar, Oclaro and Lumentum based on his positive checks with management of these firms.

The analyst said the managements say “regardless of the phase 11 to phase 12 transition pace in China, they have promised at least 10 percent q/q growth in capacity to all major customers for the next several quarters under current tenders and projects.”

“Further, there should be no air pocket in results before new higher phase 12 orders from China arrive at the end of 2Q17 or 3Q17,” Genovese wrote in a note.

In addition, Genovese believes the execution missteps at NeoPhotonics make Oclaro as an attractive take-out candidatefor Finisar, Lumentum and Acacia Communications, Inc. ACIA even at a higher price.

The analyst noted that Oclaro highly complements Finisar, of which the recent $575 million private placement puts it in a strong position to buy Oclaro in a cash and stock deal.

“Oclaro's execution has been stellar in 2016 and its outlook going into 2017 is very strong. We think OCLR is a more attractive acquisition, compared to NPTN, even at significantly higher valuation multiples,” Genovese continued.

At Last Check

• Acacia shares were up 0.72 percent at $67.12.
• Finisar shares were up 0.11 percent at $31.41.
• Lumentum shares were up 0.25 percent at $40.05.
• NeoPhotonics shares were down 15.13 percent at $10.60.
• Oclaro shares were down 1.78 percent at $9.11.