Gst a good long term communications stock very steady holding, Jdsu, take a look at it the article is a little old, but well worth the look keep an eye on it...
New Salomon Smith Barney comments about JDSU:
Technology at the Crossroads
Salomon Smith Barney
Friday, August 06, 1999
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--SUMMARY:----Equity Strategy *After a 10% decline in the Nasdaq, investors
have been wondering whether the tech sector is still the growth vehicle of choice.
*While near-term issues may weigh on the sector, such as Y2K, sub-$600 PCs,
weakness in the Internet sector, and fairly lofty valuations, we believe that
long-term fundamentals remain attractive. *We would focus on areas with strong
long-term demand trends and relatively low valuations, including selected
companies with exposure to communications, semiconductors, and contract
electronics manufacturing. *We recommend investors focus on stocks in the above
industries that trade at relatively low multiples to growth such as Intel, JDS
Uniphase, and Sanmina.
--OPINION:------------------------------------------------------------------
***Please refer to the August 6, 1999 issue of the Portfolio Strategist for any
referenced figures*** After a 10% decline in the Nasdaq, investors have been
wondering whether the tech sector is still the growth vehicle of choice. Given
outstanding issues such as Y2K, sub-$600 PCs, a plunging Internet index, and fairly
lofty valuations throughout the sector, we cannot blame anyone for their concern.
We recently spoke with the Salomon Smith Barney technology team in order to get
some clarity on these issues. Short-Term Volatility Likely, But. . . The consensus
opinion from our meeting was that in the near term the technology sector could
continue to be volatile until some of the issues looming over the sector are
resolved. While the effects of Y2K will not be known until it arrives, our analysts
expect some impact, and have consequently modeled relatively low growth rates
for the fourth calendar quarter. Analysts John Dean and John Jones also point out
that the first quarter of 2000 could be difficult as companies borrow from that
quarter in order to achieve their targets for the fourth quarter of 1999. Relatively
full valuations could already discount much of the upside present in this sector,
while leaving more risk on the downside. In addition, the threat of rising interest
rates has weighed on the sector. . . . Long-Term Outlook Still Bright However,
long-term fundamentals remain positive as a host of new products are slated for
release over the next few months, demand trends appear strong in most segments,
and as Y2K testing continues, it does not pose as much of a threat as it once did.
The global economic recovery that is taking place also presents a secular driver for
the technology industry. As nations in Europe and Asia, which lag the U.S. in
technology penetration, recover from their economic slumps, we expect them to
compete more aggressively on a global scale and that technology purchases will
increase in turn. Analyst John Jones believes that the "smart money" currently
cautious on the sector, will be ready to buy in earnest on any weakness, given the
positive long-term outlook for the sector. While Salomon Smith Barney's
recommended asset allocation currently has technology at a "market weight," there
are certain segments of the market that appear more attractive than others and
warrant a closer look. We would focus on stocks in industries with strong long-term
demand trends and relatively low valuations. Companies with exposure to the
communications segment appear especially attractive, and, in fact, we recommend
an "overweight" position in this segment. We also believe that the semiconductor
area should continue to remain strong, and that selected contract electronics
manufacturers (CEMs) could also fare well. The Quest for Relative Value We wrote
two weeks ago about the market's current search for growth companies offering an
element of relative value. We continue to believe this is the case, and would
highlight those companies in strong growth industries, but still trade at attractive
multiples to their growth rates. In the communications segment, we believe JDS
Uniphase and Cisco offer a good example. Analyst Lissa Bogaty projects that JDSU
will be able to grow its earnings at a 50% annual rate for the next five years,
whereas Cisco is projected to grow its earnings at a 25% rate annually over the
same period. Despite a growth rate twice that of Cisco, JDS trades at a similar
multiple on year-forward, fiscal earnings estimates. Part of this reflects the fact
that Cisco is a large-cap, recognizable name; however, we would rather buy JDS
which trades at 1.7x growth than Cisco which trades at 3.4x growth, as the upside
potential appears greater for JDS. Similarly, in the semiconductor area, Texas
Instruments trades at a premium to Intel, despite its lower growth rate. Analyst
Jonathan Joseph believes that Intel will grow earnings at 25% annually over the
long term, versus 20% for Texas Instruments. The valuation discrepancy is, at
least partially, due to the fact that Texas Instruments has greater exposure to the
more attractive communications sector than Intel, which is dependent on the less
attractive PC industry. However, Intel's profitability appears more attractive than
that of Texas Instruments (see Figure 1) and the company has lagged the rest of
the semiconductor industry thus far in the recovery. We believe this valuation gap
could narrow as Intel proves that its fundamentals are improving. For the contract
electronic manufacturers, a similar valuation gap exists between Solectron and
Sanmina. The large-cap Solectron commands a premium valuation to that of
Sanmina, despite similar growth rates and greater profitability for Sanmina (see
Figure 1). Moreover, we point out that Sanmina has capitalized on the trend
toward outsourcing cell phone m anufacturing, giving the company heavy exposure
(about 70% of revenues) to the high-growth communications segment. Solectron
also manufactures communications equipment, but with about 40% of revenues
derived from this area, we believe Sanmina offers investors greater exposure to a
more attractive industry at a more attractive valuation. Conclusion While we still
believe the technology sector presents upside potential for investors, there are
near-term issues that could limit its upside. However, long-term the fundamentals
appear strong and we expect the sector to perform well early next year after the
Y2K issue is clearly behind us. We continue to favor the fundamental story for most
segments of the technology sector, but note that valuations for some tech
bellwethers may already discount the growth prospects of these companies. For
investors wishing to invest in technology at this time, we recommend stocks
trading at relatively low multiples to growth such as Intel, JDS Uniphase, and
Sanmina.
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