Finisar's Issues Are Temporary; Jefferies Upgrades To Buy

Finisar Corporation FNSR saw its second upgrade in the week as the Street is becoming more bullish on the stock following the selloff after soft third quarter results and outlook.

Jefferies upgraded the stock to Buy and raised the price target to $34, as it believes issues at the company are temporary. The upgrade follows a similar move from Raymond James, which upgraded Finisar earlier this week to Strong Buy following the recent 23 percent selloff.

Rationale For Upgrade

“We believe that the recent soft results and guidance and weakness in FNSR shares stem from a technical product issue that will likely be resolved shortly and concerns around China where we are confident longer-term demand trends will be strong,” Jefferies analyst James Kisner wrote in a note.

Kisner expects the technical issues around a particular product (LR-4 CFP) to be resolved within 1-2 quarters if not sooner.

Finisar shares are also being weighed down by concerns around a near-term push-out of provincial networks in China.

“While it appears China has started more slowly this year than industry participants anticipated, we are confident based on our conversations with industry contacts and the publicly announced initiatives around upgrading the country's broadband infrastructure that any such pause should be temporary,” Kisner continued.

Kisner also highlighted Finisar has major growth opportunities in the form of 100G Ethernet in the Data Center, ROADMs in China, Data Center Interconnect, and 3D Sensing.

Further, the analyst believes Finisar may to do a large acquisition given its comments on third quarter earnings call and the recent $575 million convertible debt raise.

M&A Scenario

The analyst also reiterated his Buy rating on Oclaro, Inc. OCLR on secular growth drivers and a potential acquisition by Finisar.

“We believe a potential acquisition by FNSR at a 40% premium ($10.76) could result in FNSR shares appreciating to 12x our estimate of combined FNSR/OCLR earnings power of $3.19; this would in turn drive OCLR shares even higher to $13.89, providing another path to ~$14 for OCLR shares,” Kisner added.

Kisner maintained his Buy rating on Lumentum Holdings Inc LITE and raised the price target to $56.

Shares of Finisar closed Tuesday at $25.69. In the pre-market hours, the stock is up 1.44 percent to $26.06.

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