Monday, June 02, 2014

Oclaro (OCLR) Needs Clear Path To Success

I had to check out Oclaro (OCLR) just to get spun up on the subject matter at all of the tech shows I'll attend this summer.  They have about half the revenue of some major competitors, but their market cap of $225M trades at half their own revenue.  The fundamentals from Yahoo Finance and Reuters will tell us something.

P/E:  N/A
Profit margin:  -0.97%
EPS 5yr growth:  N/A
ROE 5yr growth:  -26.61%

Oclaro consistently loses money and underperforms its sector.  It's hard to assess a P/E multiple and EPS for a consistent loser.  I'll take a guess at why they've been losing money since 2011.  Just follow my narrative down the rabbit hole.  Their major competitors include Avago (AVGO), Finisar (FNSR), and JDS Uniphase (JDSU).  Those companies have positive EPS and trade at healthy P/E multiples.  Take a look at their profit margins below to see why the market rewards them so favorably.

AVGO:  21.71%
FNSR:  7.94%
JDSU:  5.83%

Compare those numbers to Oclaro's profit margin above.  The big players' market shares undoubtedly give them some pricing power if their legacy products are integral to someone else's product lines.  Oclaro will have enormous difficulty chipping away at those market shares.  Their position is even more precarious with several years of negative free cash flow.  Companies use FCF to invest in plant and equipment that will improve product quality.  This company's FCF history means it can't do that, so they can't compete on quality.  They also can't compete on price because they can't afford to cut prices any further; profit margin is already negative.

This is either a company in need of a turnaround or a sad case of failure to realize potential.  I'd rather attend a tech show to learn why an optical component OEM doing direct sales can't turn its earnings positive.

Full disclosure:  No position in OCLR or other companies mentioned at this time.