Optical Communications jumps on upgrade

Shares closed up 85 cents, or 8 percent, to $11.41 Friday after Wit SoundView upgraded the telecommunications hardware maker from a "buy" recommendation to a "strong buy." Earlier in the day, shares touched a high of $12.34.

Analyst Kevin Slocum said that while the optical-equipment market is still wrestling with a significant inventory surplus and sluggish demand, Optical Communications should provide investors with a healthy return in the next year.

"At this level, a 40 percent return potential exists and we believe a strong buy is justified," he wrote in a research report. "We also believe gains beyond that level are possible as it becomes clear better business trends have taken hold."

He added that checks with customers indicate the company is on track to meet third-quarter sales and earnings estimates even though sales are expected to fall 25 percent from the second quarter.

"We do not believe the customer inventory position was as pronounced in the metro optical market the company serves and we remain hopeful the company will see improved results in the fourth calendar quarter and beyond," he wrote.

Last quarter, Optical Communications posted a profit of $12 million, or 11 cents a share, on sales of $47.9 million.

The company sells transmitters, receivers, transceivers and transponders to network-equipment makers and contract manufacturers such as Cisco Systems, Alcatel, Solectron and Flextronics International.

First Call consensus expects it to return a profit of 7 cents a share in its third quarter on sales of $36.4 million.

Its shares rallied up to an all-time high of $23 in January before tumbling to a low of $5.63 in April.

All four analysts tracking the stock maintain either a "buy" or "strong buy" recommendation.