Lumentum Scored Robust 2Q Results and Offered Strong Growth Prospects Beyond 3Q; Shares Undervalued

Lumentum posted second-quarter results that well exceeded our expectations and management’s guidance on both the top and bottom lines. Sales from 3-D sensing (3DS) laser and commercial lasers came in ahead of our expectations and were more than enough to offset top-line weakness in telecom and Datacom optical products. Although the firm expects sales for the March quarter to drop by about $100 million sequentially at midpoint, this is mainly related to the softer follow-through bookings on iPhone X. We see more evidence pointing to a strong recovery in 3DS revenue starting in the second half of calendar 2018 from Android clients. In addition, Lumentum saw recovery in demand for telecom products in both North America and China and continued strength of its commercial laser business. As we have already accounted for such positive factors in our model, we maintain our fair value estimate of $55 for this no-moat name and believe shares are undervalued right now.