Notes from the JP Morgan analyst on JDSU/ETEK/SDLI/GLW.
Over 220 to 225 price target on GLW--see near the end of notes below.
Thanks to Pat for her notes from the webcast.
beta.siliconinvestor.com
To: pass pass who wrote (829)
From: pat mudge Wednesday, Feb 2, 2000 2:34 AM ET
Reply # of 830
Notes from JP Morgan webcast interview on optical networking companies they follow:
Strong sector. Still early in optics. Advances in using light vs. electricity --- learning to shove more information over communications networks. Need technology to handle the bandwidth. Optical components' suppliers are underlying these networks. They sell to the Lucents, Cienas and Nortels who in turn sell to the Qwests, Williams, Frontiers (and so on). . . "My guys" (fiber optics space) are the arms merchants.
Q: What about the JDSU-ETEK merger?
A: JDS has been most aggressive in this space, becoming a one-stop shop for optical fiber components. They've been good at making components. Trend is towards putting the stuff together --- integrated products. Need to know how to package them. JDS has struggled with packaging and ETEK was opposite. They're not as good at making products but good at packaging --- except for supply issues. Two companies a good fit. It's a large transaction. There aren't many players in this space. My guess is it gets done.
Q: Any anti-trust issues?
A: One product overlap in particular. Thin-film filters --- allow more information onto one channel. OCLI, the major supplier to JDSU, is in this space. The other big supplier was ETEK.
Q: Does this mean JDS has a corner on the market?
A: I'd say no. Corning is ramping products and other 3rd-party players also. Optical components are evolving quite rapidly. We're where we were 40 years ago in electronics. There are many different ways to do optical networking. NT, LU, Ciena --- all have competing thin-film filter technologies. The gov't will take a close look. Problem with big deals in optical components space, it's a difficult market to understand. When the gov't looks, it's not easy to get their hands around it.
Q: In 1999 the market loved JDSU. What about going forward? What were their earnings?
A: UNPH strong. Guidance is 25% quarter to quarter revenue growth. Share price increased 850% in 12 months. It'll start trading more like CSCO. Fundamentals in great shape. Demand far exceeds supply. Barriers to entry are high. Not a ton of companies coming into the market. It would take them 2 to 3 yaers to get product out the door. Needs to be highly reliable. Going to be costly (JDSU acquisitions). Market has written off good-will. Excluding good-will, acquisitions are accretive.
Q: What about pricing and margins?
A: Companies in this sector can maintain 50% margins b/c of barriers to entry. ETEK does passives (guides the light), and also packaging. Solid earnings and revenues. Investors need to look at capacity expansion. 2 to 3X last year and will be again going forward. Risk is in execution. Companies give conservative guidance.
Q: What about management team?
A: ETEK very strong (COO?) he's done a good job. How it will fall out in merger is still unknown.
Q: Let's talk about SDLI --- up 2% today.
A: They manufacture lasers and laser chips. Pump lasers are their biggest business. You have to pump more energy along the path and their pump lasers go into optical amplifiers needed to do this. Theirs are superior and taking market share. They're the world's leading supplier to the undersea market. You want best of breed, especially for undersea. And whenever you say "undersea" you say "profits." You get 2 to 3X price of land-based market. And undersea now represents 30% of SDL's revenues.
Last quarter two of three major players signed production orders and now the third has also signed. They're selling to Tyco, KDD, and Alcatel. Estimating 66% growth for 2000, really conservative, and have raised our target from $275 to $385. We're taking today's multiple and going out based on growth. SDL is selling at 30X revenues.
Q: What did they annc?
A: (goes over Q numbers) We've raised our EPS from 1.26 to 1.47 for 2000 and from 1.77 to 2.00 for 2001`.
Growth looks strong across all product lines. Demand is strong. Still can't keep up. Newer players are coming into the market --- they outsource 100% of their components. That demand is coming on in 2H 2000 and will put more pressure on companies going out 12 to 18 months at least.
Q: What happened to fiber optics stocks in January?
A: Even with sell-offs, stocks remain strong. Profit-taking from time to time, but strong over-all.
Q: Corning?
A: Besides their other divisions, they have two optics businesses: fibers that go into the ground and optical components.
Q: What about Oak?
A: They bought Oak Technologies for LaserTron. Corning makes sub-systems and needs pump lasers. They now use SDLI but by end of year Oak should have some in-house.
Q: Price targets?
A: We haven't re-stated them (b/c we did underwriting), but $135 is outdated. Target is more in the $220 to 225 range.
Q: Finistar?
A: GigE and Fiber channel. They play in enterprise, SAN market. Companies want servers to be off-site in cheaper real-estate. Finistar enables SANS. They make transceivers that go into every box. Also test equipment and link extenders --- allowing distances between sites to be up to 100kms, from current 5 to 10 KM limitations. Their product for two-way transmission will be shipping mid year. Opticity --- WDM multiplexing for outsourced storage areas. Hard to gauge the company until they've had earnings. IPOed earlier at 19, now around 60.
Q: If you could only buy one, of all the companies we've discussed, which would it be?
A: For the longer-term investor it would have to be JDSU. It's the leader with the broadest product base. The best trade is SDLI. Relative value, it's cheap. Also we're looking to them to acquire. |
