Morgan Stanley: Despite Finisar's Weak Q4 Report, Outlook Remains 'Positive'

Optoelectronics company Finisar Corporation FNSR reported Thursday afternoon with disappointing fiscal fourth-quarter results, but that shouldn't alter the bullish long-term thesis, according to Morgan Stanley.

The Analyst

Morgan Stanley's Meta Marshall maintains an Overweight rating on Finisar's stock with an unchanged $20 price target.

The Thesis

Finisar's earnings report was weak across multiple metrics, including a 300-basis point gross margin miss, but this has no bearing on the favorable long-term outlook, Marshall said in a research report. (See the analyst's track record here.) 

Gross margins were impacted by a non-cash inventory reserve in the quarter, while the datacomm market remains weak in China, Marshall said. Finisar's long-term plan suggests a 32-33-percent gross margin rate, and this may be achievable based the following expectations, the analyst said:

• Progress in the Sherman facility.
• Lower-cost datacomm products.
• A return of "some revenue growth" from China.

Finisar's ongoing strategic review process wasn't highlighted by management during the post-earnings conference call, Marshall said. Enough evidence exists to suggest a business review would "take shape in the form" of 12-15-percent operating margin targets through a portfolio review and operating expenditure rationalization, the analyst said. 

The report also shows "early signs" of opex declining toward management's 18-20-percent target, and the company should provide new updates in the near-term that would serve as a driver for the stock in the first half of fiscal 2019, according to Morgan Stanley. 

Price Action

Finisar shares were rallying 4.33 percent to $18.47 at the time of publication Friday. 

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