JPMorgan Double Upgrades Lumentum Amid Stronger Telecom Market

JPMorgan's Neutral stance on Lumentum Holdings Inc LITE's stock was based on iPhone-related concerns, but the research firm said Friday that volumes are now likely to stabilize. 

The Analyst

JPMorgan's Samik Chatterjee upgraded Lumentum from Neutral to Overweight with a price target lifted from $50 to $65.

The Thesis

JPMorgan downgraded Lumentum in November after signs of material deterioration in iPhone shipments. 

Apple Inc. AAPL accounts for around 20 percent of Lumentum's total revenue, Chatterjee said in the Friday upgrade note. Looking forward, any new iPhone revisions are likely to be "fairly limited in magnitude" and could be more than offset by growth in 3D sensing sales to Android manufacturers, the analyst said.

Lumentum's ROADM sales rose by 110 percent year-over-year to $95 million in the fiscal second quarter, Chatterjee said. Recent checks point to continued strength in network investments, which bodes well for Lumentum; the company holds a market share of at least 60 percent, and the figure is likely to grow due to investments in capacity, he said. 

The company continues to see strong growth in optical transport products, although growth will come at a "more tepid" pace moving forward, the analyst said. 

Aside from benefits from existing products, Lumentum's $60-million synergy target from the combination with Oclaro looks conservative, Chatterjee said.

Management's numbers represent just 3 percent of combined revenue, which implies upside potential of as much as $110 million if synergies track in-line with the 6-percent benchmark associated with II-VI, Inc. IIVI's acquisition of Finisar, according to JPMorgan. 

Price Action

Lumentum shares were tradig up 1.31 percent at $52.78 at the time of publication Friday. 

Related Links:

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

Lumentum's Intended Sale Of Oclaro Assets Turns RayJay Incrementally Bullish