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Optical components

OFC: Ray of Hope

1:45 PM -- SAN DIEGO -- OFC/NFOEC -- No question, most optical components stocks are feeling down lately. (See Optium's Q4 Veers South, Finisar's Down Day, and Opnext to Restate Earnings.) But there's hope.

"I'd say we're in for another year of second-half optimism," says Robert Flanagan, managing director of technology investment banking at Oppenheimer & Co. Inc.

Flanagan is the opening speaker at the The Optical Society (OSA) Executive Forum, a pre-OFC/NFOEC conference that traditionally draws a lot of heavy hitters from the components industry.

Where's that second-half optimism coming from? Simply enough, it would be the result of Wall Street having lowered its estimates for components firms. Earnings predictions are down 18 percent since December -- or only 8 percent, if you include Emcore Corp. (Nasdaq: EMKR), which gets a lot of Wall Street love because of its solar-power products.

In turn, that means companies stand a better chance of beating expectations in the March and June quarters. If that can happen, investors' attitudes towards optics could improve; investors certainly can have short memories like that, Flanagan says. (Side effect: An improvement in stock valuations could also reopen the currently closed IPO window for optics.)

The industry's fundamentals are better than last year, he adds. Valuations haven't responded in kind, partly because of the bad news that's been coming out -- JDSU (Nasdaq: JDSU; Toronto: JDU) being one exception. (See JDSU Surges After Q2.) Another factor is that big investors have chosen to avoid small-cap stocks, which mostly takes them out of optics.

This mixed message of hope and despair has become a recurring OFC/NFOEC theme. (See Video Hopes Boost Optics and Smiles Abound at OFC/NFOEC.) A second-half boost would be nice, of course, but it could be years more before the sector truly stabilizes.

— Craig Matsumoto, West Coast Editor, Light Reading

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