Canaccord raises target on Spirent Communications

Analysts at Canaccord Genuity raised their price target on shares of British telecommunications testing company Spirent from 205p to 230p on Tuesday to reflect some strong gross margins and lower opex highlighted in the group's recent update.

Canaccord pointed out that Spirent had guided for adjusted full-year underlying earnings of $92m, 12% ahead of consensus estimates, implying strong operating margins of roughly 18.3% - about 200 basis points above its previous estimate.

"We believe around half of the beat was due to slower opex growth (~3% vs our expected 5%), with the balance coming from better mix/gross margins, likely helped by the strong performance in the high-margin PNT business," said the analysts, who also noted that their earnings per share upgrades assumed a continuation of both trends in 2020.

The Canadian broker stated that Spirent's improved margins and lower opex had been partly offset by small revenue downgrades, where it nows expect just 5% and 4% growth in 2020 and 2021, respectively.

"This may seem conservative in light of the strong 5G demand drivers for Spirent's ethernet solutions, 'Landslide' to support wireless core network upgrades as well as full availability of Spirent's 5G smartphone testing solution 8100," said Canaccord.

"However, the PNT segment (~25% of N&S sales) has been 'shooting the lights out' for two consecutive years now so we are becoming slightly more wary of a possible peak in demand here."

Canaccord maintained its 'hold' rating on Spirent.