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Bull of the Day: Fabrinet (FN)

Fabrinet (FN) is a Zacks Rank #1 (Strong Buy) that provides optical packaging and precision optical, electro-mechanical, and electronic manufacturing services. The company offers a range of advanced optical and electro-mechanical capabilities in the manufacturing process, including process design and engineering, supply chain management, manufacturing, printed circuit board assembly, advanced packaging, integration, final assembly, and testing.

Unlike most tech stocks in 2022, Fabrinet had a decent year. The stock traded to all-time highs and was up for the year by almost 10%. 2023 has already started off well, with the stock running 7% higher in just the first few weeks.

With earnings just a couple weeks away, is this stock about to breakout and become one of the best performers in 2023?

Earnings momentum, analyst estimates and a strong chart suggest higher prices are a strong possibility. Investors just need to decide if they want to front run the earnings report, or be patient for a pullback.

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More about Fabrinet

The company incorporated in 1999 and is headquartered in George Town, Cayman Islands. It employs over 14,000 people and has a market cap of $5 billion.

Fabrinet serves original equipment manufacturers of optical communication components, modules and sub-systems, industrial lasers, automotive components, medical devices, and sensors.

The stock has a Zacks Style Score of “A” in Growth, but a “D” in both Value and Momentum. The Forward PE is 18 and the company pays no dividend.

Relative Strength

The stock closed 2021 at all-time highs, seemingly ignoring the tech sell off in the fourth quarter of that year. However, the sell off early last year did bring selling into the name, which pulled back about 30% in the first six months.

This price action was pretty much in line with the overall market. But Fabrinet bounced over the summer much more quickly than its peers. The stock hit new all-time highs in November and has continued higher from there.

The reason for the strong move higher has been postive earnings momentum over the last couple quarters.

Back-to-Back Earnings Beats

In August, the company reported an 8% beat. This brought investors back into the stock and close to all-time highs. From there, the stock saw some sideways trading until it jumped again after the 13% EPS beat in early November.

Looking into that Q1, Fabrinet reported $1.97 v the $1.74 expected. Revenues came in above expectations and they guided Q2 higher on both the top and bottom lines.

Management said they executed well to produce robust margins. They added that favorable foreign exchange tailwinds produced EPS that produced earnings far above expectations.  Moreover, they expect favorable demand trends to bring positive results in Q2.

Estimates Rising

Analysts hiked their estimates and price targets after that Q1 report.

Over the last 90 days, the current quarters estimates have gone from $1.73 to $1.89, or 9% higher. Numbers for next quarter have been lifted as well, with estimates going up by 7%.

Looking at the current year, we have seen estimates go from $6.95 to $7.48 over the last 90 days. For next year, estimates flatten out a bit, so investors should watch these numbers after the next earnings report in early February.

JPMorgan raised its rating on FN to Overweight and lifted its price target from $126 to $156. The firm cited the company’s exposure to secular growth markets, track record to outperform, share gains and incremental outsourcing.

The Technical Take

With the stock at all-time highs, the upcoming earnings will be a big catalyst.

If the company can impress again, the bulls should be looking for a move to the $155-57 area. This is the 161.8% Fibonacci extension drawn from the 2022 highs to lows.

If the stock does pull back into a positive earnings report, it would not shock most tech investors. In the current market atmosphere, earnings beats get sold all the time. But for those interested in the stock longer-term, they should eye the moving averages.

The $130 level is the 50-day moving average, while the 200-day is all the way down at $105.  

The $125 area was strong support in Q4, so look for that level as well.

For those looking to buy a Fibonacci retracement the half way back area drawn from September lows to recent highs is $115.

In Summary

The relative strength seen in 2022 is already leading to outperformance in 2023. Investors should keep a close eye on earnings, which will be February 6th right after the market closes.

Look for the company to beat again and possibly take out the $150 level and beyond.

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