Summary
- The optical components provider exhibits strong historical earnings growth, and should continue to grow given the expansion of the global fiber optics components market.
- Current valuations of 18.6xFY2017 P/E (adjusted), coupled with consensus earnings growth forecast of 32% for FY2018, presents a reasonable price to pay for its shares.
Strong Earnings Growth
Finisar (NASDAQ:FNSR) makes fiber optic components with main revenue exposures coming from the United States, China and Malaysia.
With the global fiber optic components market set to grow at a CAGR of 10.37% during the period of 2017-2021 (according to Orbis Research), we can infer that the industry that Finisar is operating in has strong potential for expansion.
From the above table, we can also see that Finisar’s historical sales growth has been robust over the past fiscal year, growing at a rate of 14.7%. So in addition to having the advantage of operating in an expanding market, Finisar also seems to be growing its market share or at least maintaining it. Gross margins have also expanded YoY, with FY2017 figures coming in at 34.8% compared with 28.1% a year ago. This gives a good indication that the company makes a highly competitive product allowing it to command higher margins. We think these provide good reasons why Finisar could continue to grow sales & earnings going forward.
With the current diluted EPS (adjusted) at $1.28 per share, consensus estimates according to Zacks Investment Research put FY2018 forecasted earnings growth at 32%.
Compelling Valuations After Correction
Finisar has yet to recover fully from its 20% fall after reporting ‘soft’ Q3 results in Wall Street’s eyes. In March, the fiber optics firm reported Q3 earnings of 59 cents per share on $380.6 million of revenues, compared to expectations of 62 cents a share and $389.5 million in revenues, according to Reuters. Though it missed Wall Street’s expectations, earnings still rocketed 136% from 25 cents per share a year ago.
We think that this presents a good opportunity to enter a stock with strong earnings growth potential at reasonable valuations.
Disclosure: We are long FNSR