Introducing Fabrinet

Investment Analysis Clubs Saul’s Investing Discussions
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Fabrinet is in the same space as AAOI.

A few months ago I ran my “Saul Screen” and sifted out four possible investment candidates. In fact, I started a less than 0.1% position in each just to follow them and to encourage myself to dig deeper. One of these companies was Fabrinet (FN). It has a 66% YOY earnings growth and 49% YOY revenue growth. P/E is either 15.6 or 19 (or 7 according to E*Trade???). 1YrPEG is 0.24 or 0,29.

Fabrinet describes itself this way: “We specialize in precision optical, electro-optical, sophisticated electronic PCBA and electro-mechanical process technologies for high-mix, any-volume production. Our extraordinary customer service, flexibility and skill in managing complex operations in lower cost Southeast Asia has made us the trusted partner of the world’s most demanding OEMs.”

Fabrinet was founded in 2000 by David T. (Tom) Mitchell, one of the co-founders of Seagate Technology.
Mr. Mitchell founded Fabrinet as a low-volume, high-mix service provider for the manufacturing of complex optical components. The company set out to serve original equipment manufacturers on a contract basis.
The initial funding of $1 million dollars was from Mr. Mitchell’s own capital. Hambretcht & Quist Asia soon added another $20 million dollars through its Asian Pacific Growth Fund. Fabrinet took over Seagate’s lease of the Chokchai manufacturing site. Seagate then became one of Fabrinet’s first customers.
Fabrinet continued expanding its Asia-based manufacturing hubs over the next 10 years. With the 2005 transfer of JDS Uniphase’s manufacturing operations to Thailand, the company focused on manufacturing components and modules for optical communication systems as well as industrial lasers and sensors. Fabrinet introduced the “factory within a factory” operation module, creating a system where customers provided the equipment needed to build their products while Fabrinet provided the labor, logistics, manufacturing, and a supply chain.
Fabrinet released their IPO in 2010. Since then Fabrinet has become a trusted manufacturing partner for the world’s most demanding OEMs. With about 7,000 employees worldwide, Fabrinet now provides manufacturing, packaging, process technology, and supply chain services to various markets. This includes many optical communication, automotive, and medical products in Thailand, China, and the U.S.

Of course they claim a competitive advantage.

Their markets are sensors, optical components and lasers. The optical components are reported as telecom and datacom. They recently revealed two new customers: Tesla and AWS.
Short interest is 6%.
More info at www.fabrinet.com. Bullish article by Kumquat Research on Seeking Alpha, Fabrinet: Off We Go, June 27.

KC

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Yeh Someone brought this to the board a few years ago - I remember getting confused between FN (Fabrinet) and F&N a Singapore company. It doesn’t seem to be as over extended in its sp as AAOI and certainly has a good Y1PEG value.
Ant

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Looking at the earnings track record tho I’d want to understand why it was growing at single digits until 2016 and then took off, whilst AAOI was growing high double digits forever.
Ant

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Looking at the earnings track record tho I’d want to understand why it was growing at single digits until 2016 and then took off, whilst AAOI was growing high double digits forever.
Ant

Well, one big reason for my post was to force further digging into annuals and such. There were external events and, I think, some cyclical effects. Actually, peak revenue occurred in 2011 at $743.5 million. Then there was a flood and that reduced 2012 revenue to $564.7 million and it has continued to climb, but just exceed 2011 in 2016 at $773.6 million. EPS was impacted first by the flood and then by insurance settlements so the EPS prior to 2015 are not indicative of the business.

Basically, the revenue growth 2014, 2015, 2016 is just increased demand from customers. This is cyclical and the AAOI discussions shed light on where we might be in the cycle, how long the demand will increase. There was a small ($16.5 million reduction in 2015 revenue due to discovery of improper reporting of consignment revenue which may have been shifted to 2016, not sure). The annual stated the following:

Our total revenues increased by $203.2 million, or 26.3%, to $976.7 million for fiscal year 2016, compared with $773.6 million for fiscal year 2015. This increase was primarily due to (1) an increase in our customers’ demand for both optical and non-optical communications manufacturing services during fiscal year 2016 and (2) our inability to recognize $16.5 million of consignment revenues during fiscal year 2015 because of certain consignment revenue recognition issues previously disclosed that resulted in lower revenue in fiscal year 2015. We refer to finished goods held in our warehouse on behalf of our customers as consignment goods or consignment inventory, and when the finished goods are sold, we refer to the related revenue as consignment revenue.

So, I will hold my very small position but not add. There is no recurring income here. They live contract to contract. They do have some intellectual property and some manufacturing differentiation but nothing too exciting to me. So, back to regularly scheduled programming.

KC

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Terrible Margins, AAOI and ACACIA have superior margins.

Andy

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Kevin, I like this company, and its current stock chart.
http://stockcharts.com/freecharts/gallery.html?fn
If you pull out to the weekly view you can see it has really be basing since about October 2016. I had a great pop up on very strong volume June 26, which is a very good sign as it builds it base. It is now building what chartists call a handle off that big jump up. Easy to see onthe daily chart.

You can see that once it made that big jump, people naturally took some profits, but on weak volume, and that is a very good sign. We might speculate that those were people taht bought it at higher prices and had an ugly ride down. Now they can feel good about breaking even (loss aversion, price anchoring). These are the weak holders, and they are now gone. If charting works, then it works because of this type of human psychology that never changes. Admit it, you have seen it in yourselves.

Now we wait for it to jump above $46.68 on high volume. That is the proof that big boys are buying and we slip in, get our full share and watch them take weeks to get their full share. Earnings due sometime after Aug 15, but keep you eye out for that move, the trigger does not have to be earnings. A slip about an Amazon or other data center deal could be it. Set your alerts, the game is on.

Thanks, this goes back on my growth spec watch list.

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Sorry, hit the submit button too fast. Here are the growth ratings:

ChecklistRating
Composite Rating 96 Pass
EPS Rating 96 Pass
RS Rating 79 Pass
Group RS Rating B+ Pass
SMR Rating A Pass
Acc/Dis Rating B+ Pass

All very strong. It is also #1 in its stock group and its group is 59 out of 197 (not super strong).

This is from an article on Macom, but mentions important partnership with FN: (6/26)

Macom Benefiting From Amazon Web Services

Lowell, Mass.-based Macom is getting a boost from sales of data-communications chips to Amazon.com’s (AMZN) Amazon Web Services unit, Bolton said.

“We are incrementally more positive on Macom’s datacom business upon learning that Amazon/AWS has partnered with Fabrinet (FN) to produce 100G CWDM-4 optical modules based on a reference design from (Macom unit) FiBest and based on Macom components,” Bolton said in a note to clients.

The Amazon deal could lead to business from other cloud computing service providers, he said.

“With the industry’s broadest portfolio of electronic, photonic and subassembly solutions for datacom modules, Macom in the past has discussed opportunities to partner directly with leading hyperscale operators,” Bolton said.

He added: “We believe the Amazon-Fabrinet-Macom partnership is one of the first such partnerships. Should this partnership prove successful and ramp to high volume, we imagine it will lead to partnerships with other hyperscale operators.”