Monday, February 05, 2007

Calls of Note Part 3

Citigroup is somewhat cautious on Finisar (NASDAQ:FNSR) saying that while the co remains their top stock pick for the next 12-month based on its strong potential upside to $5, they expect most of the stock appreciation in 2007 to occur in the second half of the year. Firm's checks indicate the January earnings report will likely look a lot like the October report. That is, weaker than consensus revenues at the low end of the guidance and lower than consensus revenue guidance somewhat offset in earnings by strong GMs driven by high end products that are performing well. They believe the same issue that impacted October revenues is still a problem -- low end LAN/SAN (particularly SAN) inventory in the EMS channel.

Citi's thesis regarding strong CY2H 2007/FY1H 2008 financial and stock performance hinges on the ramp with Cisco in 10G modules for Cisco's enterprise switching line. They believe Finisar has already started to ship 10G SR (short reach standard for single-mode fiber) products to Cisco and is about one month away from full qualification on the much larger 10G LRM (long reach standard for multimode fiber) opportunity.

Reiterates 12-month price target of $5 and Buy rating on FNSR but thinks in the next month or so the stock will likely pull back to $3 or slightly below. Frm would likely be aggressive buyers anywhere below $3. At $3 the stock would be trading at just 11.5x CY 2008 EPS of $0.26.

Notablecalls: Expect to see some selling pressure on FNSR over the next couple of days.

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