Raymond James analyst Simon Leopold, Georgios Kyriakopoulos, and Victor Chiu turn their analytical skills to Finisar Corporation (NASDAQ:FNSR) as they maintain a Strong Buy rating on the company.

finisar

We maintain our Strong Buy rating on Finisar Corporation (NASDAQ:FNSR) and expect the stock to trade higher considering negative sentiment. Sales trends in the Datacom segment remain strong, and a better outlook reflects a combination of this along with the u2t acquisition that appears to more than offset headwinds suspected from key customer Cisco Systems, Inc. (NASDAQ:CSCO). Seasonal challenges, factory ramps and expenses from u2t dilute near term earnings; however, we think the continued adoption of optics in datacenters, China optical builds and 4G/LTE going global establish sales growth. The noted long term prospects keep us positive and we maintain our $29 target.

Finisar reported F3Q14 sales

Finisar Corporation (NASDAQ:FNSR) reported F3Q14 sales of $294 million, missing our consensus-matching estimate of $299 million, up 1% q/q and 23% y/y. Gross margin of 37.2% and operating expenses were near estimates, but the lighter sales led to EPS of $0.44, missing our $0.46 estimate; consensus sought $0.44. Management forecast F4Q14 sales of $296-311 million which includes $6 million from the u2t acquisition vs. consensus of $297 million, with EPS of $0.36-0.40 with $0.02 of dilution from the acquisition vs. consensus of $0.40.

Seasonal factors

April seasonality is a challenge with annual price cutting mostly affecting the Telco segment with some pressure on Datacom. Hence, we are encouraged by the higher organic sales outlook than we forecast. Price reductions will contribute to a q/q drop in telco sales, but unit demand is strong enough for management to expect revenue growth in datacom in April. The gross margin outlook calls for a decline to 36% with another 0.5% drop from u2t.

Trends

Fears from Cisco Systems, Inc. (NASDAQ:CSCO)’s weak switch business and silicon photonics have been overblown. Infonetics forecasts 29% unit growth for 10G/40G/100G optical transceivers in CY14, which leaves room for price cuts as reflected in the 15% revenue forecast. We expect optical adoption in datacenters rising from a third of all ports led by Web 2.0 operators. Significant 100G telco projects (e.g., China) offer growth. The globalization of 4G/LTE mobile (e.g., Vodafone’s Project Spring) use optics to move traffic in the network.

Estimates

We increase our F4Q14 sales forecast to $300 million from $290 million but our EPS estimate drops to $0.37 from $0.39. Our FY14 sales forecast goes to $1.151 billion from $1.146 billion, up 23% vs. FY13, with EPS of $1.55 vs. $1.59 previously. Our FY15 sales estimate goes to $1.278 billion with EPS of $1.76 vs. our prior $1.232 billion and $1.72.

Valuation

Our $29 price target is based on a P/E of 17x our CY14 earnings estimate of $1.70, a multiple that is in line with Finisar Corporation (NASDAQ:FNSR)’s five-year historical average – despite our expectation for over 20% EPS growth in CY14 – to be conservative, yet still above the S&P 500 P/E multiple of 15x to account for the healthy growth.