Brightening The View On Lumentum, Analyst Upgrades To Buy

MKM Partners upgraded shares of Lumentum Holdings Inc LITE, citing the current 3D strength and the expected 2018 optical improvement.

As such, the firm upgraded shares of Lumentum from Neutral to Buy, with a $66 price target.

At publication, Lumentum shares were rallying 7.14 percent at $54.42.

Analyst Michael Genovese noted that Lumentum shares have been down over 12 percent over the past five trading days compared to a more modest 1 percent drop by the NASDAQ Composite, with weakness attributable to the noise related to new iPhone consumer demand and supply chain orders.

However, the analyst noted that Lumentum's VCSEL orders have increased, as its competitors have seen qualification and/or yield delays. Thus, Lumentum now has 100 percent market share, the analyst added.

The analyst believes Apple Inc. AAPL might need a little more VCSEL arrays than being currently estimated to account for completed 3D module yields that are high but still less than 100 percent (see Genovese's track record here).

Meanwhile, MKM Partners believes Lumentum is the only optical components company with a clear path to a near-term beat and raise, thanks to 3D Sensing upside. Looking ahead to the first half of calendar year 2018, the firm expects another very strong 3D quarter in March.

Though the firm expects Apple demand to seasonally moderate in the June quarter, it believes Lumentum will have at least two other meaningful customers, starting to contribute in the fiscal year fourth quarter of 2018.

Citing its checks, MKM Partners said the company is starting to see some slightly better VMI pulls in China for CFP2 Datacom modules. The firm believes Optical orders from China will more significantly improve, and for more products in the first half of 2018.

"We view new tenders and projects as important drivers in CY18, but we think inventory normalization is the #1 factor that will lead to Chinese demand recovery for the Optical component names," the firm said.

The firm clarified that its $66 price target is based on 13 times potential 2019 earnings per share estimate of $4.80, plus $4 per share net cash. The 2019 earnings estimate comprises $1.80 from Optical/Lasers and $3 from 3D, the firm said.