Two Techs from Forbes Investor: NeoPhotonics & ARRIS

05/30/2017 2:52 am EST

Focus: TECHNOLOGY

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

Taesik Yoon is a leading expert on growth stocks, with a particular expertise in technology. Here, the editor of of the Forbes Investor reviews two high-tech ideas in his model portfolio, NeoPhotonics Corporation (NPTN) and ARRIS International (ARRS).

Hurt by softness in the overall China market, NeoPhotonics’s Q1 revenue fell 27.7% year-over-year to $71.7 million and the company incurred an adjusted net loss of $10.7 million or 25 cents per share.

While guidance for a Q2 adjusted net loss of 19-26 cents per share also came in below consensus, much of the shortfall is due to costs related to NPTN’s sale of its low speed transceiver product lines. 

Yet as China transitions from primarily a national to provincial and metro 100G deployments and with the worldwide metro and data center interconnect markets continuing to grow at a rapid pace, this divestiture better positions the company to serve these growing markets with both its high capacity production and its new solutions focused on 400G and above coherent and data center products. 

Combined with the additional annualized cost savings of $6-9 million by Q3 from the implementation of a series of new cost saving measures and further reductions in additional areas likely as the year progresses, NPTN could return to profitability by the end of this year.  As this materializes, we think the stock will continue to rebound.

Driven by stronger-than-anticipated demand for its headend optics, nodes and CMTS license solutions, as well as some key customers accelerating inventory consumption of CPE products late in the quarter, ARRIS reported Q1 adjusted net sales and earnings of $1.49 billion and 40 cents per share. 

While down 8.0% and 13.6%, respectively, from the prior year, both figures came in at the very high end of the company’s guided ranges of $1.44-1.49 billion and 36-40 cents and topped their respective consensus estimates by $24.7 million and 3 cents. 

Furthermore, while Q2 guidance for adjusted earnings of 55-60 cents per share fell slightly short of the 62 cents analysts were expecting, this is primarily due to continued pressure put on margins by inflated memory costs, which is likely to ease as the year wears on. 

Combined with the solid order activity ARRS enjoyed during the quarter and demand trends that are expected to continue to strengthen, the company is confident it can achieve adjusted sales and earnings of $6.62-6.83 billion and $2.40-2.60 per share for the full year. 

With the stock trading at just 11 times the midpoint of this outlook, we think it continues to offer great value.

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