Finisar Corp: Zacks’ Bull of the Day Play

Market cycles typically cause significant ebbs and flows in a company’s balance sheet, and tends to increase the stocks volatility.  But when a company is able to time several long-term market cycles to their advantage, the balance sheet can post all-time revenue records.  The Zacks Bull of the day, Finisar Corp (FNSRFree Report) is experiencing the latter of the two situations.

This Zacks Rank #1 (Strong Buy) company is a provider of fiber optic subsystems and network test and monitoring systems which enable high-speed data communications over local area networks, or LANs, storage area networks, or SANs, and metropolitan access networks, or MANs. They are focused on the application of digital fiber optics to provide a line of high-performance, reliable, value-added optical subsystems for data networking and storage equipment manufacturers.

Recent Earnings Data

Finisar recently reported Q2 17 earnings where they easily beat the Zacks consensus earnings and revenue estimates for the third consecutive quarter.  The company posted quarter over quarter gains in Revenues +8.4%, Sales of telecom products +9.9%, Sales of Datacom products +7.7%, GAAP gross margins improved from 31.7% to 36.1%, and Non-GAAP gross margins rose from 33.1% to 37.2%, GAAP operating margins improved from 8.3% to 14.3%, and GAAP earnings per fully diluted per share +95.5%. Also, due to the impressive margin gains, management increased Q3 17 revenue guidance from the consensus of $378 million to a range of $378-398 million.

Management’s take

According to Jerry Rawls, CEO, “I am pleased to announce that Finisar achieved all-time quarterly records for revenues and profits in our second quarter. Revenues were $369.9 million, an increase of $28.5 million, or 8.4% over the first quarter. This growth was primarily driven by strong demand for 100G transceivers. In addition, customer demand for wavelength selective switch and ROADM line card products was strong. Our gross margins improved significantly due to a favorable product mix and leverage achieved from our vertical integration with larger volumes. The combination of revenues being at the higher end of our guidance range with higher gross margins resulted in earnings per fully diluted share above our guidance range.”

Price and Earnings Consensus Graph

As you can see in the graph below, both FNSR’s stock price and future earnings estimates have risen due to their impressive quarterly results and subsequent increase in guidance.

FINISAR CORP Price and Consensus

FINISAR CORP Price and Consensus | FINISAR CORP Quote

Increasing Estimates

Due to the strong quarterly performance earnings estimates for Q3 17, Q4 17, FY 17 and FY18 have all seen significant analyst upgrades over the past 30 days: Q3 17 rose from $0.38 to $0.51, Q4 17 improved from $0.36 to $0.48, and FY 17 jumped up from $1.39 to $1.74, and FY 18 was elevated from $1.62 to $2.13.

Bottom Line

The market’s adaptation of 100G transceivers has continued to gain traction in both their Telecom and Datacom segments.  These gains have caused their margins to grow beyond initial expectations, which enabled the company to post record quarterly revenues and profits in Q2.  Currently, management expects margin growth to remain above 35%, due to their exposure to China’s growth cycle which should continue through the first half of 2017.

Now, which stocks should you sell?

As a Zacks Rank #1 Strong Buy, this Bull of the Day deserves consideration. But today there are 220 Zacks Rank #5 Strong Sells that demand even more urgent attention. If any of these are lurking in your portfolio, they should be removed immediately. Since 1988, such stocks have actually performed more than 11X worse than the S&P 500.  See all Zacks Strong Sells and Strong Buys absolutely free >>.

In-Depth Zacks Research for the Tickers Above

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