Barclays and JPMorgan have raised their price targets on Lumentum following the Coherent news
Shares of Lumentum (LITE) were under pressure on Tuesday after the company announced it had agreed to buy laser maker Coherent (COHR) for $5.7B and reported preliminary second quarter results. Calling the weakness in the shares a buying opportunity, Goldman Sachs analyst Rod Hall upgraded Lumentum to Buy. More bearish on the name, his peer at Stifel cut Lumentum's rating to Hold as he believes the proposed acquisition of Coherent, which comes with questions surrounding limited near-term accretion and the growth of the combined laser business, likely limits stock upside over the next 12 months.
COHERENT ACQUISITION: Lumentum and Coherent announced on Tuesday that they have entered into a definitive agreement under which Lumentum will acquire Coherent in a cash and stock transaction valued at $5.7B. Under the terms of the agreement, which has been unanimously approved by the boards of both companies, Coherent stockholders will receive $100.00 per share in cash and 1.1851 shares of Lumentum common stock for each Coherent share they own. At closing, Coherent stockholders are expected to own approximately 27% percent of the combined company. The transaction is expected to close in the second half of calendar year 2021, subject to approval by Lumentum's and Coherent's stockholders, receipt of regulatory approvals and other customary closing conditions.
Lumentum also reported preliminary second quarter earnings per share between $1.91-$1.99, with consensus at $1.82, and revenue of $478.8M, with consensus at $479.63M. The company also reported a preliminary second quarter operating margin of 34%-35.5%.
BUY LUMENTUM: Goldman Sachs analyst Rod Hall upgraded Lumentum to Buy from Neutral with a price target of $117, up from $90. The analyst believes the 11% selloff on Tuesday was driven primarily by the in-line December quarter revenue in the context of expectations for strong holiday demand for Apple's (AAPL) iPhone. Further, Hall thinks the market may be interpreting this weakness as share loss for the key VCSEL lightfield array that is included in Apple's FaceID scanner. However, that share loss is unlikely for that key part, he contended. The analyst sees the strength in fiscal second quarter margins as "inconsistent with the idea of significant competitive share loss." As such, he sees the weakness as a buying opportunity given Lumentum's longer-term growth potential in the "capacity-constrained" datacom business. Hall also noted that his new estimates do not incorporate the proposed acquisition of Coherent.
Meanwhile, JPMorgan analyst Samik Chatterjee raised his price target on Lumentum to $118 from $100, keeping an Overweight rating on the shares. The analyst argued that Lumentum took another major step in consolidating the optical component market through the announced intent to acquire Coherent. The deal might concern investors as being too large a bet on the near-term recovery of the Coherent business, but implies higher long-term earnings power and greater growth opportunities as well as exposure to several end markets where the adoption and use of laser solutions has been limited to date, the analyst contended. He sees higher earnings power for Lumentum longer term.
Voicing a similar opinion, Barclays analyst Thomas O'Malley raised the firm's price target on Lumentum to $105 from $90, while also keeping an Overweight rating on the shares. The analyst respects the diversification of the revenue base with the Coherent deal and believes the company will like exceed the $150M synergy target.
MOVING TO THE SIDELINES: More bearish on the name, Stifel analyst John Marchetti downgraded Lumentum to Hold from Buy with an unchanged price target of $98 as he believes the proposed acquisition of Coherent, which comes with questions surrounding limited near-term accretion and the growth of the combined laser business, likely limits stock upside over the next 12 months. The analyst is concerned that the combined commercial lasers business could continue to struggle in a challenging market and has "significant uncertainty" regarding the timing of catalysts in the non-optical business.
PRICE ACTION: In afternoon trading, shares of Lumentum are fractionally up at $94.62, while Coherent's stock has advanced almost 2% to $199.98.
"Street Fight" is The Fly's recurring series of exclusive stories that highlight a stock or sector that is in focus amid divergent views from Wall Street analysts.