Analyst: ZTE Ban Could Spark Consolidation In Optical Space

The U.S. government banned U.S.-based telecom companies from selling hardware and software components to the Chinese company ZTE for seven years. The announcement had a ripple effect across the entire optics sector and could even trigger industrywide consolidation, according to Northland Capital Markets. 

The Analyst

Northland Capital Markets' Tim Savageaux commented in a Tuesday note on the optical and communications industry.

The Thesis

Among the most compelling opportunities for investors amid an industrywide selloff is Oclaro Inc OCRL, given the arbitrage spread in Tuesday's closing price of $8.39 and Lumentum Holdings Inc LITE's acquisition offer of $9.32, Savageaux said in a Tuesday note. (See the analyst's track record here.)

The 10-percent decline in Lumentum's stock now implies it is trading at a "very attractive" single-digit PE multiple despite boasting strong 3-D sensing drivers, the analyst said.

The sell-off seen in Acacia Communications, Inc. ACIA is "overdone by as much as a factor of 2," Savageaux said. An acquisition of Acacia would be accretive to a potential buyer like Finisar Corporation FNSR and could be the only path toward realizing value, he said.

Finisar could make use of its more than $1 billion in cash and offer $35 to acquire Acacia in a 70-30 cash-and-stock deal, the analyst said. This would generate approximately the same level of accretion as the $6 EPS that is likely to occur from the Lumentum and Oclaro deal.

Price Action

Shares of Oclaro were trading higher by 0.72 percent early Wednesday morning, while shares of both Acacia and Finisar were higher by about 1 percent each.

Related Links:

Analyst: Acacia Will Be Hurt By ZTE Ban, Others Will Win

Craig-Hallum: Lumentum's Oclaro Purchase Could Trigger Further M&A In Optical Sector