Spirent's refocus and new CFO leads to Jefferies upgrade

Spirent Communications was upgraded to 'buy' from 'hold' by Jefferies on Thursday as the testing company has "refocused" the business on markets that could drive stronger growth.

Jefferies, which lifted the target price to 145p from 88p, said there appeared to be further headroom in pricing, cost control and returns, which suggested possible upside of 30% to earnings per share.

Spirent has a muddy track record after either under- or over-earned due to volatile investment and R&D cycles, but analysts at the bank feel the current realignment and strategy "make sense".

This leads to seven key drivers for the top line, of which three highlights are faster growth in carrier network capex, data centre and cloud spend than the company anticipates; a quicker and more aggressive ramp up in 5G; and incremental volumes from virtualization and the potential to cross sell security solutions.

"In addition to positive market drivers, we believe that the new CFO will install new discipline in investment that generates improving returns. The most important metric to get moving is the revenue line but we see scope to potentially improve pricing and tighten up operating costs," they said.

While EPS forecasts are just upped 1%, it could grow almost 30% above consensus in 2018 if the market growth rates in much of the industry data translate into faster revenue growth; margins move up as gross margins and R&D come into line with global peers, and Spirent acquires $40m of revenues.

"In that scenario we believe the shares could be worth 200p."