We introduced contract manufacturer Fabrinet (Ticker: FN) to the IAS in March 2011 at a price of 31. Shares have since lost about one-third of their value. Although we naturally prefer to broadcast our winners, rather than our losers, it’s interesting to look back at the experience this company has given investors over the past year. Calling Fabrinet’s performance “a little bit of everything” doesn’t nearly do the stock justice.

We were originally drawn to Fabrinet because of the good growth prospects in its end markets. At the time of selection, about 80% of Fabrinet’s revenue came from optical communications, with the remaining 20% coming from a fast-growing business in industrial lasers/sensors. Some of the prominent OEM’s in these industries include JDS Uniphase, Finisar, and Coherent. All have interesting growth prospects, but their fortunes tend to see-saw violently, and so go their stock prices. We love growth in the IAS, but we don’t much care for cyclicality. As a neutral third-party serving multiple OEM, Fabrinet seemed poised to grow with whichever players happens to be winning in the marketplace at any given time.

Contract manufacturing can be an unattractive commodity business, but Fabrinet has carved out a niche where product lifecycles are short and margins are relatively generous. Both optics, as well as lasers/sensors, are expected to grow steadily for years, but lasers/sensors are expected to grow faster and to represent an increasing share of revenue over time. In the twelve months before entering the IAS, Fabrinet had revenue of $652 million. Management believed that the path to $1 billion would be a smooth one. With a strong balance sheet and a lean management structure, Fabrinet looked poised to grow sales and profits at double-digit rates.

In truth, our timing was awful. The entire optics industry took a dirtnap in March, and Fabrinet followed right along with its customers. We thought Fabrinet would hold up better than its customers. Indeed, the market’s logic in penalizing Fabrinet wasn’t apparent. Fiscal Q3 2011 financial results showed revenue growth of 42%, with quarterly GAAP EPS of $0.49. With earnings rising and the stock trading down into the low 20’s, Fabrinet’s P/E was nearly into single-digit territory—a very compelling bargain! So it seemed anyway.

Fiscal Q4 2011 was also impressive. Sales grew 21% to $190 million. EPS grew 12% to $0.48. Nothing in the stock market was going up then, however. Fabrinet shares oozed down to 16 before bouncing back up to 20 after the earnings release. As the market bottomed in the fall of 2011, Fabrinet’s stock was holding up a little better than the rest of the industry.  As they say, however, “you can’t spend relative performance.” The company’s growth was good. The stock’s valuation was compelling. So what could possible go wrong?

What happened was that it rained. And rained. And rained. Most of Fabrinet’s facilities are located in Thailand, a detail we noted in the original IAS profile back in March. In late 2011, Thailand experienced the worst flooding the country had seen in a century. Half of Fabrinet’s factory space flooded, with immense damage to both inventory and tooling. Business came to a stop. Shares traded down to 12. As the flood waters receded, Fabrinet began the process of salvaging damaged equipment. Recovery efforts are still underway, but at least the company is selling product again. After two fiscal quarters interrupted by flooding, the company forecasts Q3 revenue to be about $195 million, down 32% from last year’s figure. Investors seem relieved that at least the gears are turning again, sending shares back up to 20 on the company’s recent earnings release. Fiscal Q4 should show sequential growth relative to Q3, with Q1 2013 expected to represent the company’s first full-speed quarter since Q4 2011. 2012 reported earnings will depend greatly on the timing and magnitude of certain insurance payments. We encourage investors to look past the current GAAP accounting and try to estimate a steady-state EPS figure when evaluating the value of these shares. Uncertainty pertaining to the ongoing flood recovery means some risk still lingers here, but as the company’s future prospects become more and more visible to the market, shares could prove rewarding over time.

Disclaimer:  This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.