Finisar Has Long-Term Value Despite Still-Expensive Stock Price

NEW YORK (TheStreet) -- With the better-than-expected result released from rival Avago Technologies (AVGO), it would seem demand for optical networking components is back on the rise. And this should put shares of Finisar (FNSR) back on the radar of investors looking to capitalize on that growth.

And although Finisar stock seems expensive today at 68 times earnings, the Sunnyvale, CA.-based company, which reports fiscal fourth-quarter earnings Friday, can still reward investors willing to be patient for the next 12 to 18 months.

Finisar stock -- despite being up more than 15% in 2015 -- has a mean analyst rating of "buy," and an average analyst 12-month price target of $24. That means analysts expect 7% gains from current levels of around $22. Assuming Finisar can reach its high analyst target of $27, the stock could gain 20%.

While the its trailing P/E of 70 implies above-average risk, its P/E drops to 17 based on fiscal 2016 mean earnings estimates of $1.26 a share. And if Finisar does meet its 2016 estimate, it would have grown earnings by 20% year over year.

Finisar's projected five-year annual growth rate is 23.81%, meaning that analysts expect Finisar's earnings to increase over the next several years -- which could also mean a rising stock price over the long term.

Finisar makes optical networking components that are used in both wired networks and wireless networks for large telecom carriers like AT&T (T). And Finisar's products have been instrumental in AT&T's buildout of its high-speed 4G LTE network (Long-Term Evolution).

Given the rate at which network bandwidth continues to increase to support things like video and sound, there's a better than a strong chance that some aspect of Finisar's gear will be used to push the boundaries of those data streams. This would explain why the average analyst is bullish on the stock and why the company's five-year projected earnings growth rate is above 20%.

Finisar's long-term growth rate also explains the 21% six-month surge in Finisar stock, which has outperformed the 5.7% gains in the S&P 500 (SPX) index during that span. And given the rate at which Finisar continues to diversify its product line, the company looks poised to post another earnings beat Friday.

For the quarter ended April, earnings are projected to be down 30% to 25 cents per share, while revenue is seen climbing 5% year over year to $320.5 million. For the full year, earnings per share is projected to be $1.05, down from $1.53 a share last year, while full-year revenue of $1.25 billion would mark an 8% jump year over year.

In short, despite the recent struggles owed to weak carrier spending, not only does Finisar appear to be ahead of its pace of recovery, but earnings growth is back on its priority list. So with the stock trading at around $22, down some 110% from its 2011 high of $46.09, the risk versus reward potential seems to tip heavily towards the positive side.

 

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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