JPMorgan Finds Multiple Reasons To Turn Bullish On Lumentum

A combination of encouraging industrywide trends and an attractive valuation are behind JPMorgan's bullish Lumentum Holdings Inc LITE stance.

The Analyst

JPMorgan's Samik Chatterjee upgraded Lumentum from Neutral to Overweight with an unchanged $80 price target.

The Thesis

JPMorgan downgraded Lumentum from Overweight to Neutral in early May, and a bullish stance can be justified once again for multiple reasons, Chatterjee said in the upgrade note. (See the analyst's track record here.) 

They are: 

• Firsthand checks and discussions with telecom contacts suggests an improving demand outlook with a ramp in 5G investments, the analyst said. The demand for optical transport equipment continues to be strong, and there are signs of component shortages that could prompt higher prices for Lumentum can take advantage of, he said. 
• Lumentum's competitors are showing signs of producing lower-quality products, including competitor Applied Optoelectronics Inc AAOI, which generates 80 percent of revenue from its  datacom business, Chatterjee said. 
• Lumentum continues to benefit from strong growth in 3-D sensing products within existing Apple Inc. AAPL products and expectations for inclusion in Android products in the near-term.
• Lumentum's stock moved lower after IPG Photonics Corporation IPGP's negative pre-announcement. IPG's comments suggest poorer-than-expected demand in the lasers business rather than optical transport, Chatterjee said. 
• Optical transport and transmission components made in China are of poorer quality, which suggests minimal risk to Chinese tariffs on U.S. suppliers, the analyst said. 
• Lumentum's pending acquisition of Oclaro Inc OCLR is expected to be finalized next year, but JPMorgan's buy-side contacts are only assuming a 50-percent chance of approval, Chatterjee said. 

Lumentum's stock has lost nearly 20 percent since August, which creates an attractive buying opportunity for investors, the analyst said.

JPMorgan's $80 price target is based on a 14 times NTM P/E multiple on 2019 estimates which is still a discount to the 16 times average within the overall networking equipment group.

Price Action

Lumentum shares were trading more than 3 percent higher at $57.29 at the time of publication Thursday. 

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