Bad news for one company could send shockwaves throughout the entire space. This appears to be the case for II-VI (IIVI), the world’s largest optical component company.
Writing for Needham, five-star analyst James Ricchiuti tells clients that Ciena’s issuance of weak guidance on September 3 “sparked a sell-off in IIVI and across the optical space, no doubt exacerbated by the broad market sell-off.” While he acknowledges that IIVI shares had been struggling before the news broke, the stock is trading well below Ricchiuti’s revised out-year non-GAAP EPS estimate, the five-year average and 9x EV/estimated out-year adjusted EBITDA.
This is not to say all hope is lost. “We are not downplaying CIEN’s weak guidance, and in fact have trimmed our estimates. However, CIEN’s commentary regarding strong traffic growth, together with the healthy conditions IIVI cited in mid-August, suggest this is more likely a pause than the onset of a down-cycle,” Ricchiuti stated.
Offering additional explanation, the analyst said, “We still see multiple drivers in IIVI’s business, including continued strong demand in the SiC substrate business, share-gain opportunities in 3D sensing, ongoing strength in the defense market and recovery in its industrial vertical. Even assuming demand pauses in the communications market over the next one to two quarters, we believe the underlying fundamentals are still solid, suggesting the company’s top-line growth outlook remains intact, with cost synergies expected to result in strong growth in adjusted EBITDA this year and next, along with expanding adj. EBITDA margins.”
It should also be noted that IIVI wrapped up fiscal Q4 with a record backlog of nearly $1 billion. This backlog includes $580 million in the photonics business and $375 million in compound semiconductors, “the latter driven by bookings strength in the SiC substrate and 3D sensing markets.” The implication? According to Ricchiuti, it gives the company better visibility over the near-term.
In line with his optimistic approach, Ricchiuti reiterated his Buy rating. However, he did cut the price target from $60 to $57. Should his thesis play out, a twelve-month gain of 46% could potentially be in the cards. (To watch Ricchiuti’s track record, click here)
Turning now to the rest of the Street, 9 Buys and 4 Holds have been published in the last three months. Therefore, IIVI has a Moderate Buy consensus rating. Based on the $56.13 average price target, shares could rise 44% in the next year. (See II-VI price targets and analyst ratings on TipRanks)
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