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What happened

Shares of Fabrinet (NYSE: FN), a manufacturer of advanced optical and electro-mechanical components, soared 29% by 1:15 p.m. ET on Tuesday after the company reported earnings beats on both the top and bottom lines last night.

It was expected to report only $1.80 per share in profits on sales of $641.4 million, but instead announced that in its fiscal fourth quarter of 2023, earnings topped $1.86 per share, pro forma, and sales hit $655.9 million.

So what

Fabrinet grew its sales 11.5% year over year in the fourth quarter, and earnings per share under generally accepted accounting principles (GAAP) were up only 9.2% — not exactly rampant growth. Moreover, those earnings ($1.65 per share) were noticeably smaller than the $1.86 that analysts are focusing on today.

Another thing to keep in mind is that Fabrinet’s fourth-quarter results represented a marked slowdown in growth this year. For all of fiscal 2023, Fabrinet’s sales growth was 17.2%, and its earnings growth was 25.6%.

Relative to that performance for the year, therefore, I’m not sure what investors are so excited about as they review the fourth-quarter news — unless it was the mere fact of the earnings beat.

Now what

Admittedly, Fabrinet is promising another beat in the coming quarter. Turning to guidance, management forecast sales of about $660 million for the first quarter of 2024 — ahead of Wall Street’s $657 million prediction. Likewise, the company forecasts quarterly, per-share, pro forma profits of about $1.865, a razor-thin $0.005 ahead of what analysts are expecting.

Is that enough to justify bidding up Fabrinet’s share price by nearly 30% today, though? I have my doubts.

Not only is next quarter’s projected beat smaller than this past quarter’s — which itself showed noticeable slowing in growth of both sales and profits. Next quarter’s forecast also shows a likely continued slowdown in sales growth, projected to be about 4% (or 5% if Fabrinet’s guidance proves correct). And it implies a reversal in earnings growth for the stock, with pro forma profits predicted to decline by about 5% year over year in the first quarter.

Fabrinet had a fabulous year in 2023. But its fourth-quarter numbers were only good, not great, and the first quarter seems likely to be considerably worse. An investor in Fabrinet today might be best advised to take advantage of the stock’s near 30% one-day profit and get out while the getting is great.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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