For quite sometime, I have been helping young brokers, investment managers and equity researchers with baseline valuations. Almost all of them want to focus on the short-term, what I call the churn. Sure it generates a commission for them and for their investment house, but it really doesn't build any long-term wealth.

Case in point, I had a young investment manager call me recently, said he had a new client that was referred by a friend and that this new client wanted to know what he thought about Finisar Corporation.

I always ask about a new prospect, and when I did I was told the person was a doctor. To be kind, most doctors suck when it comes to investing. So I told the young investment manager I would get back to him in a day or so.

When I did, I told him that true wealth was built over a lifetime of investing and that Finisar was not actually fit for the purposes of wealth building, I was asked if I could skip the long-term stuff and just let him have the bottom line.

Fine. I told him that an investment in this company would be like standing in a packed elevator with dog crap on the bottom of your shoe and hoping nobody noticed. He was not amused, but I thought it was a good analogy.

I wonder if he'll call back?

Finisar Corporation

Finisar Corporation is a provider of optical subsystems and components that are used in data communication and telecommunication applications. Their optical subsystems consist primarily of transmitters, receivers, transceivers, transponders, optical engines, and active optical cables that provide the fundamental optical-electrical, or optoelectronic, interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks as well as the antennas and base stations used in wireless networks. Listed competitors include Avago Technologies Ltd, Viavi Solutions, and Oplink Communications.

Short-Term Value

My short-term (3-6 week hold) target price for the stock is $19.08, with an initial trailing stop set at $17.70. Upward price movement will find resistance at $19.07 and $20.40, with final resistance found at $22.01. Downward price movement will find support at $17.44 and $16.75, with final support found at $15.72.

Days to Cover

The most recent days to cover number is 9. The days to cover number is a measurement of the company’s outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is sometimes used as a volatility precursor for a stock.

The Tax Act

The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a company’s earnings and consequently its fair value.

In the case of Finisar Corporation, the company revalued its net deferred tax asset and recorded a reduction in its deferred tax assets and a corresponding deferred tax expense of approximately $30.3 million. For fiscal 2018, the company’s blended corporate income tax rate is 30.4%, which is based on the applicable tax rates before and after the enactment of The Act and the number of days in each period.

The Tax Act allows 100% expensing of cost of qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The bonus depreciation percentage is phased down from 100% beginning in 2023 through 2026. The company elected to claim the 100% bonus depreciation for the assets placed into service after September 27, 2017. The net impact of this provision is not material to the company’s financial position, results of operations and cash flows.

The Act also implements a territorial tax system. In general, under the territorial tax system, the company’s foreign earnings will no longer be subject to tax in the U.S. As part of transitioning to the territorial tax system, The Act includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. As of December 31, 2017, the company had approximately $123.0 million of undistributed earnings for certain non-U.S. subsidiaries that have been indefinitely reinvested outside the U.S. The mandatory deemed repatriation of these undistributed earnings resulted in a one-time deferred tax expense of approximately $19.1 million. This provisional estimate may be impacted by a number of additional considerations, including, but not limited to, the issuance of final regulations and the company’s ongoing analysis of The Act.

The company has historically asserted its intent to reinvest these earnings in foreign operations indefinitely and continues to do so. The company does not intend to repatriate these earnings to fund its U.S. operations and, accordingly, it does not provide for the U.S. state income and foreign withholding tax on these earnings.

Note that for fiscal 2018, 0% of net income came from income tax benefits.

Insider Transactions

In the past 12 months, the company has reported 58 insider trades involving 1,150,688 shares of stock. Of those 58 insider trades, 18 were Buys involving 553,796 shares of stock, and 40 were Sells involving 596,892 shares of stock, creating an insider buy to sell ratio of 0.9 to 1.

Mergers/Acquisitions

There were no mergers or acquisitions during fiscal 2018.

Divestitures/Dispositions

There were no divestitures or dispositions during fiscal 2018.

Year-Over-Year

Year over year metrics of interest are revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and year to date price growth. For Finisar Corporation, revenue decreased by 9%, earnings decreased by 115%, free cash flow decreased by 163%, total debt increased by 5%, and the stock price decreased by 47%. Year to date the stock price is up 15%.

Future Value

My future (5-year hold) target price for the stock is $28, which is an average annual return of 12%. A prior five-year hold of the stock (FY2014- FY2018) would have returned an average of 4% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value

As an on-going concern, my baseline valuation for the company is $11. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value for the stock is $(3). The fair value number is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of an AAA-rated corporate bond. Value investing buy, sell, and close targets are derivatives of fair value.

Value Considerations
Other value considerations include the PE Ratio, the PEG Ratio, Book Value, Tangible Book Value, Price to Book, and Price to Tangible Book. For Finisar Corporation, the PE Ratio is (52), the PEG Ratio is (2.7), Book Value is $14, Tangible Book Value is $13, the Price to Book Ratio is 1 and the Price to Tangible Book Ratio is 1.

Fair Warning

Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Finisar Corporation (Nasdaq: FNSR) – FYE 04/2018 – OVERVALUED The stock is currently trading at levels above my most recent $(5) close target. Please See Linked PDF Worksheet