Ancillary plays in the "rising tide" segment:
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Corning Implications : Corning's (GLW) blow-out earnings report mentioned earlier on this page has inspired investors to wager on which other companies might share in Corning's good fortune. Clearly the optical networking space is booming, but in making such earnings plays, two factors are critical. First, you must understand the specific industry in which the firm operates. And second, you must correctly discern whether strength in that industry is benefitting all participants, or the leaders are simply stealing business from their competition. In the case of Corning, strength in revenue and earnings growth stems primarily from two segments: optical fiber and optical components. It's ironic that amidst a fiber optic investment boom, the actual conduit for all things optical -- the fiber itself -- is often forgotten. Corning's competitors in this space are Lucent (LU), Alcatel (ALA), and Pirelli. The investment options here are limited since fiber sales for LU and ALA are a small portion of total sales and thus these are not pure plays. It's a different story in the optical components business. In addition to the giants: LU, ALA, and Nortel (NT), Corning also competes with JDS Uniphase (JDSU) and its recently announced acquisition target SDL (SDLI). Other competitors in this arena are New Focus (NUFO), Avanex (AVNX), Bookham (BKHM), Oplink (which filed for an IPO on Friday), and privately held companies such as Chorum and DiCon Fiberoptics. In the components business, there are plenty of pure plays, and the likelihood is that Corning's success is not just a function of it winning market share. If you look at the SEC filings of the customers of these component makers, many note concerns about shortages of optical components, which appears to be driving business to any firm that can produce. We therefore wouldn't include firms that are development stage or have little proven sales success such as Precision Optics (POCI), Lumenon (LUMM), and APA Optics (APAT) as obvious winners (they're not necessarily losers either, it's just that Corning's news says nothing about their development and sales progress). For those that are producing, it is quite likely the case that a rising tide in this industry is lifting all boats. Looking ahead at earnings season, LU and SDLI report on Jul 19, NT on Jul 25, JDSU and NUFO on Jul 26, and AVNX on Jul 27. BKHM and ALA will be reporting in August. Judging from GLW's success, most of these companies should handily exceed estimates, particularly the pure plays on optical components. Lucent would be the one concern given its exposure to non-optical businesses, and its poor execution in the optical space late last year. - Greg Jones, Briefing.com |
