Monday, December 02, 2013

Investing in Fiber Optics Earnings Growth




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Alliance Fiber Optic Products (AFOP) was profiled back on August 2, and since that time, the stock rose as much as 45%, but has fallen all the way back to the original price. The ride isn't over for this fiber optic play and it is again the Bull of the Day as a Zacks Rank #1 (Strong Buy).

More Broadband Required

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. Since then, there have been several publications stating the same thing. What the others were missing is the idea that those devices will all drive the need for more bandwidth from the carriers.

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 two before it as a meet.

The main idea with a company the size of AFOP is to look at revenue growth. Revenues has started to increase, coming in at roughly $19M for the June 2013 quarters and $23M for the September 2013 quarter. That topline growth is likely to continue.

Stock Split

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.

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. The consensus now stands at $0.96.

Valuation

The valuation has become much more attractive as the stock price has fallen. The forward PE moved from 18.6x to 26.6x and is not back to 15x 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 back again to 4.1x as the industry average has held still at 6x. One metric that stands out to me is the expected revenue growth rate. Estimates are calling for 21% growth compared to 12% for the broader industry. That sort of growth on the top line should lead to impressive earnings growth as well.

The Chart

The price and consensus chart for AFOP shows how the earnings movements have helped push the stock higher. Over the last year or so, the stock has seen a dramatic increase in price as estimates have risen. The estimates have not decreased while the stock has seen a healthy correction. The fundamentals and story look to still be intact and this recent move lower has presented a great buying opportunity.



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