Morgan Stanley Stays Neutral On Lumentum, But Sees Path To Bull Case

The bullish case for Lumentum Holdings Inc LITE can't me made today, but the optical stock could become more attractive if consensus estimates are lowered, according to Morgan Stanley.

The Analyst

Analyst Meta Marshall maintains an Equal-weight rating on Lumentum Holdings with an unchanged $55 price target.

The Thesis

Lumentum's exposure to the 3-D sector hasn't progressed as quickly as investors and sell-side analysts had hoped for, but at the same time the market is overlooking $1 to $1.50 in earnings power from the 2018 Oclaro acquisition, Marshall said in a Monday note.

Coupled with Lumentum's eventual earnings power of $1.50 to $2 per share from 3-D, the company's total earnings potential of $4.50 per share places at the top of Morgan Stanley's "Optical Scorecard," which ranks five optical companies, the analyst said. 

Despite an encouraging outlook, the Street is pricing in an additional "world-facing VCSEL" module on the back of certain upcoming new iPhone devices, Marshall said. This prompted the Street to mostly lift expectations for Lumentum, but there is no confirmation of Lumentum's exposure to upcoming iPhone devices, he said. 

If most sell-side firms lower their EPS expectations for Lumentum by 75 cents to $1 per share to reflect a lack of a "world-facing module" in upcoming iPhone devices, then investors could turn aggressive, Marshall said. In the interim, shares of Lumentum offers investors an "attractive setup" with potential upside of $10 per share, he said. 

Price Action

Lumentum Holdings shares were down 0.83 percent at $45.35 at the time of publication Monday. 

Related Links:

Raymond James: Lumentum Still A 'Strong Buy' Despite Apple's Guidance Cut

Analysts Forecast What's Next For Lumentum After The Oclaro Acquisition