Optical Networkers Heading Even Higher?
NEW YORK (
) -- A strong quarterly report from
Finisar
(FNSR) - Get Report
sparked a rally across the optical networking sector on Thursday and at least one analyst thinks the group may just be getting started.
Miller Tabak reiterated its buy rating on Finisar, along with the "single best idea" status it's bestowed on the stock, and lifted its 12-month price target to $27 from $25 in the wake of the results. And while the firm was impressed by the company coming in 5% ahead of Wall Street's profit expectations and boosting its outlook, it sees an even greater opportunity ahead.
"We remind investors that 2012 should be the strongest year in the Optical market as the massive upgrade of Service Provider networks to 100Gb
gigabyte systems moves into the steep portion of the adoption curve," said Miller Tabak analyst Alex Henderson in a note to clients.
Henderson got more specific later in the note, pinpointing the companies -- Finisar,
JDS Uniphase
(JDSU)
and
Oclaro
(OCLR) - Get Report
-- that should benefit most from the momentum it sees in tunable XPF transceivers, which it sees emerging as a major product category.
"Tunable XFP is a no brainer for Optical Systems OEM
original equipment manufacturers and Service Providers. They love the product," the analyst writes. "Tunable XFP transceivers, products responsible for sending and receiving signals within agile optical networks, provide a dramatically smaller, pluggable and cost effective solution compared to older transceiver products."
He goes on to explain that because there is a higher bar for cost and complexity with the tunable XFP technology, the reward should be that much greater for the market leaders.
"Instead of 20 companies delivering off-the-shelf products and beating each other up on price, there are only 3-4 players able to make the investment and have the technical wherewithal to compete," the note reads. "The result: A number of low margin commodity markets evaporate and are replaced by a much higher margin end market where margins are well above the industry average of 30-35%."
The analyst adds that he thinks Finisar, JDS Uniphase and Oclaro could all be capacity constrained through the end of 2011.
The stocks responded mightily on Thursday with Finisar adding 16.6% to $23.06, JDS Uniphase gaining 4.2% to $12.64, and Oclaro jumping 9% to $11.07.
Year-to-date, the group has already done quite well, appreciating 120%, 47% and 67% respectively, but if the shift in the market plays out like Miller Tabak's Henderson believes, those returns could be just the beginning.
--
Written by Michael Baron in New York.
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