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Daily Alert - 5/27/20

Analysts expect this optoelectronics manufacturer to post 87.2% growth this year.

Analysts expect this optoelectronics manufacturer to post 87.2% growth this year.

II-VI Incorporated (IIVI)
From Canaccord Genuity Research

IIVI reported a solid beat and raise in its first full quarter of Finisar, driven by record bookings and backlog of $840M and $893M, respectively.

Specifically, revenue of $627M was above consensus of $576M and our $584M estimate. Gross margin in the quarter reached a high-water mark of 39.2, driven by a relentless focus on cost reduction and integration. This led to adjusted EPS of $0.47, above consensus of $0.14 and our $0.11 estimate.

We are raising our estimates to reflect the early success integrating Finisar (largest investor concern) and broad end market demand across most segments, as well as the ramp and qualification at the Sherman facility.

IIVI has a long history of successful M&A integration. Specifically, the Street bet against IIVI with the Oclaro deal in 2013 and lost, in our opinion. While Finisar is of much greater size and
scale, it would seem IIVI’s cost discipline is paying off.

On the demand side, IIVI is largely exposed to the Asian supply chain without getting tangled in trade through Asian partners. As such, we anticipate IIVI will be able to benefit from the spate of recent data points that suggest a rebounding post-COVID market in this geography. This supports the FQ4 outlook for revenue of $650M-$700M and non-GAAP EPS in the range of $0.50-$0.70, compared to consensus of $648M and $0.53.

IIVI’s cash and cash equivalents as of March 31 were at $388M. In connection with the latest acquisitions, the company entered into senior credit facilities totaling of $2.43B. As of March 31, the total debt was $2.28B. The covenants require the company to maintain net leverage ratio of no greater than 5x; as of FQ3, the net leverage ratio was at 3.8x.

We are reiterating our BUY rating and adjusting our price target to $52, which is based on applying a 22x multiple to our FY21 EPS estimate of $2.38.

Jed Dorsheimer, Canaccord Genuity Research,, May 12, 2020