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By George Leong, B.Comm. Published : February 8, 2019
LITE Stock Is Way Too Cheap
The battering ram from the December selling capitulation left a nasty mark on many technology growth stocks. And while some feel it’s time to exit, my view is that it’s a pretty decent time to put together a list of battered stocks to look at.
A mid-cap stock you may want to include on your watchlist is Lumentum Holdings Inc (NASDAQ:LITE), down 25% over the past three months and hemorrhaging well below its 52-week high of $74.40 in March 2018.
For those of you who are not familiar with Lumentum, the company develops optical, photonics, and 3D sensing technology.
Those that follow LITE stock also know the company provides some of the components used for the front-facing camera on the new generation Apple Inc. (NASDAQ:AAPL) “iPhone.” The technology allows for “FaceID” and augmented reality.
The decline in Lumentum stock is partly attributed to caution and lower-than-expected sales for the most recent “iPhone X,” but the reality is that the company has clients other than Apple and is growing at impressive rates, coupled with a cheap valuation.
While the weakness is understandable, the rate of the selling in LITE stock has been overdone. For aggressive traders and longer-term investors, this spells an opportunity.
Chart courtesy of StockCharts.com
My Bullish Thesis for LITE Stock
Lumentum grew its revenues in each of the last four fiscal years ending in June.
The company broke above the $1.0-billion revenue mark in fiscal 2017, followed by impressive growth of 24.57% to $1.25 billion in fiscal 2018.
| Fiscal Year | Revenue (Millions) | Growth |
| 2014 | $796.3 | |
| 2015 | $837.1 | 5.12% |
| 2016 | $903 | 7.87% |
| 2017 | $1,000 | 10.92% |
| 2018 | $1,250 | 24.57% |
(Source: “Lumentum Holdings Inc.,” MarketWatch, last accessed February 7, 2019.)
The outlook continues to indicate strong revenue growth. Lumentum is estimated to ramp up revenues by 29.3% to $1.61 billion in fiscal 2019, followed by 29.4% to $2.09 billion and as high as $2.23 billion in fiscal 2020. (Source: “Lumentum Holdings Inc. (LITE),” Yahoo! Finance, last accessed February 7, 2019.)
Lumentum generated positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in five consecutive years, including a record $224.3 million in fiscal 2018, up 85.99% compared to fiscal 2018.
The company also has a strong grip on expenses, with a move to profitability in fiscal 2018.
| Fiscal Year | Earnings Per Share |
| 2015 | -$0.06 |
| 2016 | -$0.05 |
| 2017 | -$1.71 |
| 2018 | $3.82 |
(Source: MarketWatch, op cit.)
For fiscal 2019, Lumentum Holdings Inc is estimated to ratchet up its earnings to $4.39 per diluted share, followed by $5.28 per diluted share in fiscal 2020.
The estimates for LITE stock go as high as $4.88 and $6.23 per diluted share for FY18 and FY19, respectively. (Source: Yahoo! Finance, op cit.)
On a free cash flow (FCF) basis, Lumentum delivered a healthy $154.3 million in fiscal 2018. The ability to generate strong FCF is critical for technology companies as it relates to capital expenditure.
| Fiscal Year | Free Cash Flow (Millions) |
| 2014 | -$10.9 |
| 2015 | -$44.3 |
| 2016 | $4.6 |
| 2017 | -$53.1 |
| 2018 | $154.3 |
(Source: MarketWatch, op cit.)
Analyst Take
The fact that LITE stock is trading at only 8.04-times its consensus fiscal 2020 earnings per share and has a price/earnings-to-growth ratio of 0.78 indicates an undervalued situation.
Discounting in the high estimate, Lumentum stock trades at a mere 6.82-times. The low valuation affords the company some downside cushion.
Even if the price of LITE stock doubled, the multiple would still be attractive.
The insiders at Lumentum Holdings Inc seem to understand the cheap valuation. During the last six months, insiders bought a net 421,834 shares, comprised of 34 purchases and only seven sales. (Source: Yahoo! Finance, op cit.)
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