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Technology Stocks : Oclaro, Inc. (Avanex-Bookham)

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From: Glenn Petersen12/29/2010 7:18:50 AM
1 Recommendation   of 2294
 
Why Finisar Should Acquire Oclaro

Finisar could challenge the other optical suppliers with such a deal.


By B. Riley & Co.
Barron's
Dec. 28, 2010)

Finisar announced the closing of its public offering of 4.14 million shares, resulting in $117.9 million in net proceeds.

As a result of this offering, Finisar's (ticker: FNSR) net cash should be approximately $215 million-$220 million by the end of the third fiscal quarter. We have slightly reduced our earnings-per-share estimates to $1.65 and $2.03, respectively, from $1.68 and $2.09 for fiscal 2011 and 2012, respectively.

Despite reduced EPS estimates, we have increased our price target to $34.50 from $33.40 as a result of using a slightly higher valuation multiple since the optical-component industry appears to be headed for another robust year in 2011. As the leader of the pack, we believe Finisar deserves the premium it currently commands.

We could be reaching, but we believe Oclaro (OCLR) would nicely complement the company's core business. Even though Finisar is the leader in the optical-component industry, its product portfolio is fairly concentrated. It does not have tunable lasers, amplifiers and is very weak in passives. While amplifiers and passives are not very hot, tunables are.

For example, JDS Uniphase (JDSU) currently owns the tunable XFP market, and both Finisar and Oclaro will have tunable XFPs by the March quarter. Finisar would have to source from other tunable vendors, while both JDS Uniphase and Oclaro have tunable lasers.

Unfortunately for Finisar, there aren't that many vendors to source tunables from. In fact, aside from JDS Uniphase and Oclaro, we are not sure if smaller private companies are any good in terms of technology or reliability. This would put Finisar at a great disadvantage compared to JDS Uniphase and Oclaro. In addition, the optical-component vendors, especially the leaders like Finisar, JDS Uniphase and Oclaro, are moving higher in the value chain. Thus, they would rather sell line cards that contain various parts including WSS ROADMs, amplifiers and passives. Once again, JDS Uniphase and Oclaro have all of these parts whereas Finisar does not have amplifiers and is weak in 1passives. Thus, Finisar could be in the market for these technologies.

We heard JDS Uniphase was on the block for a while, but apparently it is off the market, at least that is the latest rumor. This leaves Oclaro as the only company that has all three technologies that Finisar would be interested in: tunable lasers, amplifiers and passives (Avanex of Oclaro was a major passive component player before the merger with Bookham). [Oclaro was formed by the merger of Avanex and Bookham]

Furthermore, while Finisar is the leader in the 40G client-side, the line-side is wide open, with Opnext (OPXT) and Mintera (now part of Oclaro) having a slight edge over the rest of the field. Perhaps Opnext's line-side 40G technology could be the clincher.

If Finisar and Oclaro were to merge, that will put significant pressure on the rest of the field to consolidate. Even then, it may be too little too late for the rest of the field to seriously challenge Finisar/Oclaro. Yes, the combination of Finisar/Oclaro would be that powerful.

-- Dave Kang

online.barrons.com
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