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Morgan Stanley Downgrades Lumentum Holdings, Raises Target To $27

Morgan Stanley downgraded Lumentum Holdings Inc LITE 2.53% to Underweight from Equal-weight saying "the current price builds in peak optimism about the duration of demand and margin health and will likely move sideways even if there was to be margin upside in the next few quarters."

"While we are early, we think relative to other risk/reward profiles in our coverage universe, there are better opportunities today," analyst Meta Marshall wrote in a note.

The downgrade comes as the company reported better-than-expected earnings despite capacity constraints as gross margin improved about 200bps from better product and generation mix.

Marshall said Lumentum is seeing demand from three relatively concurrent investment cycles namely China, 100G datacomm and 100G metro.

The analyst raised first quarter and FY17 top-line estimates for Lumentum on account of the datacomm and metro upgrades still being in early stages, with major additions to come online next year.

"Our revised FQ1 and FY17 revenue and EPS estimates are now $252.5mm/$0.44 and $1,032mm/$1.80 vs. $242.7mm /$0.37 and $982mm / $1.45 previously," Marshall noted.

Though the analyst remains cautious on margins, he admitted he was surprised thus far in the cycle, with higher likelihood of upward revisions in the next 6-9 months.

"While we think demand could remain healthy for a longer period, as mentioned above, we are more cautious on the ability of margins to remain at their improved levels as the industry continues to have too many participants vs. buyers (and buyers work on their own internal silicon efforts)," Marshall continued.

"Given we think margins will return to a more normalized level once capacity comes online across the industry, we continue to think the company should trade at a more traditional average (~15x P/E or $27 with revised 17e EPS)," Marshall added.

The analyst has raised the price target to $27 from $20.

Shares of Lumentum closed Wednesday at $31.82.

Aug 2016Morgan StanleyDowngradesEqual-weightUnderweight
Aug 2016JefferiesMaintainsBuy
Aug 2016BarclaysMaintainsUnderweight

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