After growing by more than 50% in 2018, shares of Fabrinet [NYSE: FN] seem poised to keep moving upwards in 2019. Yet is this a true upward trajectory, or is the stock headed for a quick fall on short notice? Before you rush out to buy Fabrinet stock, you need to know the pros and cons… and what it does!
What Does Fabrinet Do?
Based in Thailand and founded in 1999, Fabrinet is the world’s largest manufacturer of outsourced optical, electromechanical, and electronic components.
The company’s chief executive Seamus Grady assumed the position in September 2017, taking over after 13 years at the helm of one of its competitors, electronics manufacturing services provider Sanmina.
Fabrinet manufactures products for six different markets: aerospace, automotive, industrial, medical, life sciences, and optical electronics.
However, its optical communications equipment (i.e. fiber optics) division currently represents 80% of company sales. Fabrinet’s biggest competitors include Finisar [NASDAQ: FNSR], Oplink Communications, and NeoPhotonics Corporation [NYSE: NPTN].
Is Fabrinet Stock a Buy?
Fabrinet stock had a banner year in 2018, nearly doubling in value. Between January 2018 and January 2019, the company was one of the best performers in the S&P Small Cap 600 Index.
Even better, the good times are expected to keep rolling throughout 2019. The company’s earnings per share are predicted to grow by 25% this year, outperforming the industry average of 12%.
In addition, its year-over-year cash flow growth currently stands at 17%, higher than many competitors and the industry average of 14%.
Total revenue in Q4 2018 was $403 million, at the high end of estimates. Fabrinet [NYSE: FN] also projects that revenue for Q1 2019 will fall in the range of $384 million to $392 million.
With all this in mind, the foundations of Fabrinet stock look very strong. One further consideration for Fabrinet is the Chinese market. With its strategic location in Southeast Asia, Fabrinet is highly sensitive to developments in the Chinese economy.
US China Trade War Benefits Fabrinet
As such, Fabrinet stands to profit from the ongoing trade war between the U.S. and China.
The U.S. has already placed tariffs on $250 billion of products imported from China.
Many manufacturers are looking to flee Chinese soil in an effort to avoid these tariffs—and some of them will be looking right next door in strategic locations such as Thailand.
In anticipation of growing demand in the near future, Fabrinet [NYSE: FN] is working on the construction of a new 550,000-square-foot plant.
Fabrinet Positioned To Win New Contracts
What makes Fabrinet well-positioned to keep winning contracts against its competitors?
For one, it has developed a strong economy of scale. The company currently occupies more than 25% of the global optical components market, and more than half of all outsourced optical component products. This allows it to develop products more efficiently and at lower cost.
Fabrinet [NYSE: FN] also has partnerships with optical component original equipment manufacturers (OEMs) such as Lumentum and Oclaro.
These companies have chosen to outsource part of the manufacturing process to Fabrinet, in the belief that Fabrinet can produce components at less cost and higher quality.
Thanks to a combination of these factors, Fabrinet is able to post profit margins that exceed twice the industry average.
What’s more, this positive reputation is likely to continue into the future. Switching away from Fabrinet to another manufacturer mid-stream is risky for the company’s partners, due to long OEM qualification times and short product cycles.
The Risks of Buying Fabrinet Stock
Like any other stock, of course, Fabrinet doesn’t come without its downsides and these could affect the Fabrinet stock price prediction.
The main concern right now is the potential for a Chinese economic slowdown. Fabrinet counts many Chinese companies among its customers, and any disruption in China’s economy could upset this balance.
Slowdown In Chinese Manufacturing
December 2018 was the first time in 19 months that the Chinese manufacturing sector shrunk in size, sending stock markets downward and disrupting currency exchanges.
If more bad news is on the horizon, then these macroeconomic trends could have an impact on individual stocks such as Fabrinet as well.
Another warning sign is that Fabrinet founder and director David Mitchell sold 30,000 shares of the company’s stock in March 2019, a transaction which generated more than $1.7 million in profit.
Corporate insiders selling their stock is sometimes—although not always—a red flag. Since other company executives appear to be holding onto their shares for now, it’s possible that this move won’t be of much concern.
Fabrinet Stock Prediction: The Bottom Line
While there are risks to buying Fabrinet stock, it’s hard to argue against it at this stage. The main question is whether Fabrinet’s strong growth in recent months is sustainable, and the answer appears to be yes for the short and medium terms. The company has the potential to outperform both its competitors as well as the industry as a whole.
Fabrinet currently has a lot of momentum behind it. The company is posting good results every quarter, and the stock is coming off a year of remarkable growth.
Due to Fabrinet’s encouraging numbers and its solid position as an arbiter of the U.S.-China trade war, Fabrinet remains a compelling investment opportunity.