Lumentum Holdings (LITE) is a quality stock with solid fundamentals and good growth prospects, although shares have been in significant decline mode since early January due to severe market headwinds.
Unfortunately for the shareholders of Lumentum, the shares have suffered a loss of more than 25% since then. But, once the negative sentiment passes, Lumentum should recover rather quickly. Thus, I would hold onto shares of Lumentum.
On TipRanks, LITE scores a 10 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to outperform the broader market.
About the Share Price
Due to headwinds from serious factors, such as the conflict in Ukraine and increased inflation, Lumentum’s share price is likely to continue trading lower as these issues appear to remain unresolved, for the time being.
The 14-day relative strength indicator of 36.68 shows that the stock could still fall well below its current level, as there is still plenty of room for more selling
This technical indicator takes values between about 20 and 80. Any value in between means the stock is still not overbought or oversold. The value of 80 means overbought, while 20 means oversold.
About Lumentum Holdings
The company manufactures optical and photonic products for market applications such as data centers, telecommunications and networks.
Also, these products are employed in the manufacturing of commercial lasers and are widely used in life sciences.
The company’s headquarters are in San Jose, California.
Good Results to Highlight
Operations performed solidly in the third quarter of fiscal 2022 (which ended April 2, 2022), enabling the company to report results that came close to the most optimistic expectations on several financial metrics.
Although total revenue of $395.4 million was slightly lower (about -5.7%), compared to the same quarter of fiscal 2021, it exceeded analysts’ median forecast by $5.24 million.
By segment, Optical Communications was down 11.3% year-over-year to $344.2 million, while Lasers was up 62% year-over-year to $51.2 million. Optical Communications accounted for 87.1% of total revenue, while Lasers accounted for 12.9%.
Revenue was lower year-over-year, but Lumentum emphasized that demand for its products is accelerating, particularly for products in the telecom industry.
That means Lumentum could soon see a sales increase rather than a year-over-year decline, likely from the current quarter. As demand for components is expected to exceed supply, margins, which are still lower year-over-year, should also improve. Higher prices will help increase the company’s profitability.
On a non-GAAP basis, the gross margin of 49.5% for the third quarter of fiscal 2022 was a decrease of 40 basis points from the same quarter of fiscal 2021. The operating income margin of 26.5% decreased by 140 basis points.
Non-GAAP net income was $1.19 per diluted share in the third quarter of fiscal 2022 versus $1.26 per diluted share in the prior-year quarter. However, it beat the median estimate of analysts by $0.07.
Looking ahead to the last quarter of fiscal 2022, which will end earlier in July 2022, the company expects net sales to range between $405 million and $430 million, while a consensus among analysts is around $417.56 million.
In addition, the non-GAAP operating margin is expected to be between 26.5% and 28%, while non-GAAP diluted earnings per share (EPS) should fluctuate between $1.25 and $1.40. Among analysts, the consensus for non-GAAP diluted EPS is $1.33.
Organically and Through Acquisitions
Commenting on the Q3 fiscal 2022 financial results, Alan Lowe, President and CEO of Lumentum said: “I am highly optimistic about our outlook and believe market inflections beneficial to Lumentum in our addressable markets will drive double-digit revenue growth in fiscal 2023 and beyond.”
The acquisition of NeoPhotonics (NPTN), an optoelectronics products manufacturer with annual sales of $390 million, for $16 per share in cash, should provide a strong catalyst for Lumentum’s stock price.
The deal is expected to close before the end of the current year.
The Financial Condition
The company will support its growth expectations with a balance sheet that looks fairly solid from a financial standpoint. As of April 2, it had $2.56 billion in cash and short-term securities versus total debt of $1.92 billion.
The balance sheet is highly leveraged, but an interest coverage ratio of 2.37 suggests the company can easily bear the cost of the interest charges maturing on the outstanding debt. Ideally, this ratio, which is calculated as earnings before interest and taxes (EBIT) divided by total interest expense on all the outstanding debts, should be not less than 1.5. When it is lower, it suggests the company is having trouble honoring its financial obligations.
Wall Street’s Take
In the past three months, nine Wall Street analysts have issued a 12-month price target for LITE. The stock has a Strong Buy consensus rating based on eight Buy ratings, and one Hold rating.
The average Lumentum Holdings price target is $113.44, implying a 43.07% upside potential.
Valuation
Shares are changing hands at $79.29 as of the writing of this article, for a market cap of $5.47 billion. Moreover, a price-earnings ratio of 33.7, a price-sales ratio of 3.62 and a 52-week range of $77.32 to $108.90 currently exist.
Also, the 50-day moving average is $86.58 while the 200-day moving average is $91.5. According to these statistics, the share price does not seem expensive. However, because the factors driving these headwinds could last for several more weeks due to the severity of their triggers, the stock could likely see more attractive entry points in the coming weeks. That could encourage adding shares of Lumentum Holdings to each position in the near-term.
Conclusion
Lumentum shares have fallen significantly thus far this year, due to strong market headwinds caused by the war in Ukraine, and risky monetary policies around the world to curb rising inflation.
In the meantime, Lumentum wants to increase its sales, both organically and through acquisitions.
The stock is poised to bounce back strongly once the current headwinds wash over the market.
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