Lumentum Is Cheap on the Dip
The technology sector has underperformed the broader market over the past week and month. The NASDAQ is up a mere 0.72% over the past month versus a 3.11% gain by the Dow and 2.09% by the S&P 500.
Already we are see some market pundits suggesting that the good days for technology stocks are gone, but I disagree.
My view is that any sustained weakness in technology stock prices means a more attractive entry point for investors, compared to the recent highs.
In the mid-cap space, an intriguing stock that is under some current selling pressure is Lumentum Holdings Inc (NASDAQ: LITE), a developer of optical and photonics equipment, including the high-potential 3D sensing technology used in the “iPhone X.”
The LITE stock price had been surging on the chart, on optimism about its supply deal with Apple Inc. (NASDAQ:AAPL), and it broke toward the $70.00 level in July, prior to the subsequent dip.
The price of Lumentum stock is currently down 28.5% from its high, including a 13.5% decline over the past month, to the point where I see an aggressive opportunity.
My Fundamental Bull Case for LITE Stock
Lumentum has delivered higher revenue growth from $837.1 million in FY15 to $903.0 million in FY16 and $1.0 billion in FY17.
The growth metrics look brighter, with Lumentum estimated to drive revenues by 25.9% to $1.26 billion in FY18 and 12.7% to $1.42 billion in FY19. (Source: Lumentum Holdings Inc. (LITE), Yahoo! Finance, last accessed December 8, 2017.)
But what really caught my attention was the expected earnings growth for Lumentum.
For FY18, Lumentum is expected to report an adjusted $3.40 per diluted share, representing a surge of 75.25%. Better yet, Lumentum could see earnings rise to $4.00 per diluted share in FY19 and as high as $5.06 per diluted share. (Source: Ibid.)
The fact the consensus earnings per share (EPS) has been rising over the past 60 and 90 days is bullish and supports the idea that a higher share price for LITE stock is on the horizon.
It’s not that often that you can find a technology growth stock that trades at an attractive multiple like Lumentum.
Consider that LITE stock trades at a mere 12.26 times its consensus FY19 EPS and an even cheaper 9.7 times its high EPS for FY19.
The price/earnings to growth (PEG) ratio of 0.77 is cheap and suggests that LITE stock trades at well below its projected compound annual growth rate (CAGR) for earnings. Discount in the free cash and the PEG declines to a cheaper valuation.
The chart shows LITE stock breaking below its 50-day and 200-day moving averages, which is marked by a bearish death cross pattern.
Chart courtesy of StockCharts.com
Lumentum needs to find support at around $45.00, otherwise the stock could falter toward $35.00.
On the upside, a rally could see Lumentum move back toward $55.00–$60.00, followed by another attempt at $70.00.