Is It Time to Dial Into Finisar?

NEW YORK (TheStreet) -- There's a lot going on these days within the telecom industry -- from Alcatel-Lucent's (ALU) restructuring efforts to Ciena (CIEN) posting better-than-expected earnings.

Nokia ( NOK) is making deals. Also making things interesting is Cisco's ( CSCO) impressive beat-and-raise performance after which the network giant hinted at broad recovery in carrier spending.

With these factors in mind, it would seem appropriate to raise expectations for Finisar ( FNSR), a company I've always wanted to like but just couldn't. Although Finisar has a decent lead in the optical components space, management has not been able to convert this advantage into significant free cash flow. Now seems like the time.

Back in December I raised this same argument, suggesting the stock was poised to rebound on improved network expenditures. But here we are seven months later and these shares are pretty much where they were at the start of the year. On the heels of a solid end to the company's fiscal year, investors are back, looking for a reason to believe in this name once again.

It's hard to be excited by 2% year-over-year revenue growth. But this is the mistake investors often make. But from my vantage point, the 2% revenue growth alone doesn't describe the real strength of this quarter. The company also posted an 11% sequential improvement in its data communication products, helped by increased demand for its Ethernet transceivers.

Likewise, revenue for telecommunication products advanced more than 12% from the third-quarter. Remarkably, the double-digit sequential improvement was amid weak carrier spending environment and drastic price reductions of several of the company's products, most of which when into effect in January.

Still, management continues to make significant advancements in terms of customer loyalty, reporting its top 10 customers now account for almost 60% of the company's business, up from 55%. This suggests to me that Finisar is more than holding its own in the face of stiff competition from the likes of JDS Uniphase ( JDSU).

What's more, given the 150 basis-point sequential improvement in gross margin along with the 15% sequential rise in net income, management has figured out ways to leverage the company's strengths into profits. As the carrier spending environment continues to recover, it will be interesting to see if this trend continues. Given Finisar's upgrade cycle, which should continue to boost sales, I wouldn't bet against the company.

I'm not going to pretend that this was a blowout quarter. But it was certainly a solid performance by a company that is still trying to win the Street's respect. What these results also demonstrate is, among other things, that there is indeed cause for investor optimism, and the expected rebound in telecom companies is not as far-fetched as previously thought.

I say this while understanding full well Finisar still has some obstacles to face. Although several of its high-profile clients including Cisco and Ciena are performing well today, which helps boost Finisar's earnings, there are still a handful such as Brocade ( BRCD) that haven't been able to capitalize on the spending recovery.

Although management was right to be encouraged by the fact that 60% of this quarter's revenue arrived from the company's top 10 customers, it also means that two-thirds of the company's sales are heavily weighted on a sustained recovery. Although I'm inclined to believe that the recovery is real, the persistent struggles of Alcatel-Lucent make it tough to give the "all is clear" signal.

For now, though, Finisar investors have to be pleased with the improved margins and free cash flow, two metrics that have long been popular cited bear arguments against this company. Although I believe there could be plenty of long-term unrealized value based on the company's recent performance, I'm willing to wait one more quarter for confirmation. I was fooled once before.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

More from Opinion

Tuesday Turnaround: Micron, Autonomous Driving, and J.C. Penney

Tuesday Turnaround: Micron, Autonomous Driving, and J.C. Penney

Cable Stock Investors Should Keep an Eye On Wireless Broadband's Rise

Cable Stock Investors Should Keep an Eye On Wireless Broadband's Rise

Trump Blinks on China Trade War That's Looking Harder to Win

Trump Blinks on China Trade War That's Looking Harder to Win

Monday Madness: GE, China, and Micron

Monday Madness: GE, China, and Micron

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly