Monday, September 23, 2013

Investing in Fiber Optic Products

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Alliance Fiber Optic Products (AFOP) was profiled back on August 2, and the stock is up 45% since then. The ride isn't over for this fiber optic play and it is again the Bull of the Day as a Zacks Rank #2 (Buy).

Back in July I wrote about my "Best Tech Stocks For 2nd Half of 2013" and I discussed the idea of more devices coming soon and how they will create demand for more bandwidth. To satiate the demand for that bandwidth, service providers are increasingly turning to fiber optics.

Over the last few weeks companies that service the fiber optic market have been on fire. Ciena (CIEN) recently beat earnings and guided higher pushing its stock higher by 14% and Finisar (FNSR) reported earnings which they had previously revised guidance for, and then came out with another increase in guidance.

Company Description

AFOP designs and manufactures components, modules, and subsystems that empower dynamic optical network, and facilitates the migration of fiber optics from the long haul through the last mile. That is all industry jargon for they make a fiber optic connection to your business or home a reality.

Earnings History

The most recent quarter was viewed by Wall Street as a beat of two cents. Zacks has the quarter and the one before it as a meet.

The main idea with a company the size of AFOP is to look at revenue growth. Recently, the company increased its revenue guidance for the next quarter from a range of $19M-$20M to more than $22M. The chart below shows how expectations for revenue have grown throughout this year.

Stock Split & More Shares

The company recently split its stock 2 for 1. Some investors like when this happens as the stock appears to be "cheaper". Savvy investors understand that the split is a mathematical equations that does nothing to the valuation of the stock or the amount of dollars invested in the stock before the spilt. The end result of a split like this is that there are more shares, and thus the divisor in the EPS equation requires more net income to move the needle in a meaningful way.

The Company is holding a special shareholder meeting on October 21, 2013. The purpose of the Special Meeting is to consider and to vote on three proposals. One of the proposals is to increase the number of shares of authorized Common Stock from 20,000,000 to 100,000,000 shares. This move will cause some dilution to shareholders, but it will also make the stock much more attractive to the institutions that would make an investment, but are fearful of the current concentration of shares. Right now, only 31% of the stock is held by institutions and greater availability of shares should serve to push that metric higher.

Earnings Estimates Adjusted

In March the Zacks Consensus Estimate for 2013 was calling for $0.49. The number bumped up to $0.53 in April and was again raised to $0.66 in May. Analysts went on vacation in June, as the consensus didn't change, but they really kicked estimates higher following earnings in July. The consensus now stands at $0.86. That means earnings estimates have increased by 71% since March.

Estimates in the paragraph above were adjusted from the most recent profile of AFOP as Bull of the Day due to the stock split.


Since the last time I profiled AFOP as the Bull of the Day, the valuation has move higher. But when you consider that the stock moved up by 45%, you have to expect the valuation metrics to move higher. The forward PE moved from 18.6x to 26.6x while the industry average has held still at roughly 20x the next twelve months earnings. Price to sales also jumped from 5x to 7.4x and again the industry average has held still. For the most part, the valuation story is moving higher, but it’s not out of control expense at this point.

The Chart

The price and consensus chart for AFOP shows how the earnings movements have helped push the stock higher. The chart has not updated the prior estimates to reflect the recent stock split. So for the chart I thought I would show where it was when I last profiled the stock. I expect this ride to continue.

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