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IPO Focus: Optics illusion
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November 2, 2000: 2:37 p.m. ET
Optical Communication Products float may be rough due to sluggish sector
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NEW YORK (CNNfn) - In the new-issues market, never have the old lessons about timing proven more true than in recent weeks, when suddenly skittish IPO investors have become far more finicky, even when it comes to the once-infallible optical communications sector.
That attitude shift has raised some doubts about the prospects of Optical Communication Products Inc. -- a solid company in a popular sector which had a pricing outlook just three weeks ago that appeared to be no less than divine.
The Chatsworth, Calif.-based company, which makes gadgets that help speed the transmission of data on the Internet, boasts of an impressive list of customers, strong operating margins and the enticing lure of possibly becoming the next great optical buy.
But the recent sluggishness in the fiber optic sector may lessen some of the company's glitter in the eyes of IPO investors, although analysts are still calling it among this week's best buys.
"This one is right up there as the pick of the week," said John Fitzgibbon, editor of WorldFinanceNet.com.
Showing some 'backbone'
Indeed, betting on a backbone play -- those companies that provide the plumbing of the Internet -- has long proved to be a good strategy in the IPO market. Fiber optic companies have consistently provided some of the best first-day gains.
Finisar Corp. (FNSR: Research, Estimates), which competes against Optical Communication Products, rose 357 percent on Nov. 19, 1999, one of the strongest first days on record. A more recent deal, Stratos Lightwave Inc. (STLW: Research, Estimates), a developer of optical subsystems, climbed 68 percent in June.
Optical Communication Products Inc. initially figured to fall into the same category. The company's products convert traditional electric signals into quicker optical bands of light and then back again to electric. Its technology can also be used in different environments, including local area networks and wide area networks.
The company, slated to price its deal Thursday and trade Friday, was expected to follow suit and produce a strong first day given the company's history of profitability.
Optical Communication Products had net income of $16.7 million on revenues of $69.1 million for the nine months ended June 30.
It also touts a blue chip list of clients including Cisco Systems (CSCO: Research, Estimates), Lucent Technologies (LU: Research, Estimates) and Nortel Networks (NT: Research, Estimates). But the company also faces stiff competition from Finisar Corp. (FNSR: Research, Estimates), IBM (IBM: Research, Estimates), Lucent Technologies and Agilent Technologies (A: Research, Estimates).
The company has strong operating margins of 42.7 percent, while most IPOs in the sector produce in the upper 20s or low 30s, said analyst George Nichols, of Morningstar.com. However, the company hasn't generated the buzz that a fiber optics deal normally does because it is not a flashy startup and lacks the backing of a high-profile venture capital firm, Nichols said.
The Furukawa Electric Co. Ltd. of Japan currently owns 70.3 percent of Optical Communication Products. After the IPO, Furukawa will hold 63.2 percent of outstanding shares and 94.5 percent of voting power.
Once strong
Fiber optics has long been viewed as one of the strongest sectors in the IPO market. But things change quickly for new issues. Last week, analysts sounded the death bell for the highflying fiber optics sector after disappointing news from bellwether companies, such as Nortel Networks and Lucent Technologies, helped send the broad market plunging.
On Oct. 25, Nortel reported third-quarter earnings that beat expectations, but revenue that was lower than most had expected. The company also posted a 90 percent rise in optical networking systems sales, which was much lower than several analysts' expectations of about 120-to-125 percent growth during the quarter.
Nortel's news followed a fourth earnings warning from Lucent Technologies Inc. (LU: Research, Estimates). Such news caused analysts to slice expectations for IPOs coming in sector.
"Fiber optics got slammed last week," Fitzgibbon said. ""They were the last of the industrial groups to get whacked."
But a sector rebound last Friday caused analysts to revise estimates this week, though many are still hedging their bets. Morningstar.com's Nichols had said earlier that OCP could climb by as much as 50 percent. However, he has since changed his view.
"Now is absolutely the worst time for an optical IPO to come to market," Nichols said.
WorldFinanceNet.com's Fitzgibbon said OCP has the best chance not to crash of the four new issues this week. Ben Holmes, president of IPOpros.com, who had expected a small premium from OCP revised his expectations earlier this week. Holmes upgraded his expectations to "Hot" and said the company could gain as much $5 in its first deal.
"Networking deals are making an incredible run," he said. "A week ago it wasn't."
But OCP is one of the rare fiber optic IPOs that has yet to bump up its price range, which could prove a boon to investors.
"This could be one of the rare instances that investors can buy an IPO at a reasonable price in the aftermarket," Nichols said.
Optical Communications Products is expected to trade under the Nasdaq symbol "OCPI." 
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