B. Riley Downgrades Fabrinet, II-VI, Says Optical Companies 'Will Suffer The Consequences' Of Tariffs

Shares of optical technology companies Fabrinet FN and II-VI Inc. IIVI were slipping Tuesday after B. Riley FBR downgraded the stocks due to macroeconomic uncertainty and valuation reasons. 

The Analyst

B. Riley Financial analyst Dave Kang downgraded Fabrinet from Buy to Neutral and maintained a $52 price target. Kang also downgraded II-VI from Buy to Neutral and maintained a $54 price target. 

The Thesis

In light of tariff-related uncertainty, Kang said he's strategically moving to the sidelines in anticipation of a better entry point. (See the analyst's track record here.)

Kang outlined the drivers behind the downgrades in a Tuesday note. 

Several optical stocks appreciated in August, resulting in limited upside for Fabrinet and II-VI shares, Kang said. He questions whether the gains are sustainable.

“Our latest checks indicate that the overall demand picture is a bit murky, which seems to contradict the solid results and outlook from various optical companies," the analyst said.

"Although most of optical companies have reported/provided solid 2Q/3Q results/outlook, we believe the strong demand seems to be isolated to Ciena Corporation CIEN and, to a lesser degree, ZTE. Outside of these two NEMs, demand from other customers such as Huawei seems to be choppy." 

Kang said he's also considering the potential impact from U.S. tariffs and the major overhang on the optical industry.

Most of B. Riley's industry contacts expect negative repercussions from proposed tariffs on Chinese imports, Kang said. 

“Our caution stems from whether service providers will push out capex if the tariffs get implemented in September, resulting in weaker demand for optical components. We note that most of our optical company coverage will suffer the consequences even though the magnitude of the impact will vary."

Price Action

Fabrinet shares were down 3.57 percent at $46.16, while II-VI shares were down 2.86 percent at $48.32 at the time of publication Tuesday.

Related Links:

Potential Winners And Losers In The Optical Space From The Tariff Dispute

Morgan Stanley's Guide On How To Play The Optical Space