Which Optical Stock Will Reward You? – Fabrinet (FN) and More

This week I have gone for a former IPO darling that ultimately fell flat on its face, but now looks fit-and-ready to challenge once more. Fabrinet (NYSE:FN) debuted in 2010 at a discount to its initial IPO price, but soon found its feet to rapidly ascend to $32.91.  However, the joy wasn’t to last, and it subsequently entered a steady decline, ultimately visiting its IPO lows in October of last year.  However, the stock has since found a new lease on life, enjoying a series of heavy accumulation days to bring it back to where it lies today.

The major reversal in its fortune came in November, not long after its all-time low, when it delivered on better than expected earnings.  Revenues had been steadily increasing since the end of 2011, which ran contrary to its price action, but November finally saw positive price action to match solid earnings.  Then its reported revenue of $158.6 million was ahead of the expected $147 million, even though it was down nearly 15% from a year earlier.  However, when factored for Price per Sales (0.8) and Price per Book (1.5), the stock became far more attractive to buyers.

Fabrinet’s earnings in February continued November’s good form.  Revenue grew to $167.5 million on a 73% growth in reported sales.  A gross margin of 11% and operating margin of 7.5% also came in ahead of November, and finished goods inventory dropped from the previous quarter.  February’s earnings simply reaffirmed valuations and enabled buyers to take out the $14 ceiling that had previously attracted sellers.  Even at current prices, Price per Sales still remains below 1.0, with a Price per Book at just under 2.0.

Going forward, there was no change in raw material inventory, which suggests flat growth for the next quarter.  But does that mean the best is past it? Is there anything we can learn from companies in its industry?

Oplink Communication, Inc. (NASDAQ:OPLK) is considered a direct competitor to Fabrinet, although it’s able to run significantly higher Gross Margins at 38.6%.  It recently reported earnings, which were at the top end of expectation with a weak quarter in Asia – although there was pick up in Asian markets for December.  Its expectations were flat for American, European, and Asian markets, which reaffirms Fabrinet’s outlook.

JDS Uniphase Corp (NASDAQ:JDSU) has a long standing relationship with Fabrinet, as investment, customer, and supplier.  JDS Uniphase Corporation’s Optical Communications and Lasers business reported a 4.9% sequential drop in revenue in fiscal Q2.  Despite the loss in revenue, gross margin grew to 28.3% from 27.5%.  Laser sales also fell 5.3% from Q1, but gross margin edged out a small gain to 44.4%.  Next quarter, JDS Uniphase Corporations expects a slight increase in demand for optical components, but this will be offset by a further decline in demand for lasers; the net outlook is for a flat to +3% gain in revenue, with operating margins around 8% to 10%.