IMHO JDSU's recent buying of etek and sdli if it goes through will be quite dilutive and given the current market conditions,the potential for a major haircut on the downside is much higher than a move to the upside.
Damn! I had a great post constructed and made the mistake of hitting Apple 8 on my iBook instead of option 8 to get those cute bullets and lost the entire post. Rats!
That's an interesting thought, but let's take the numbers apart for JDS Uniphase's latest excellent quarterly report to see what is really going on under the hood. No doubt plenty of dead tree scraps are needed to run the numbers if you download the financials at the following link where you get no less than six different income statements. Six! Here's the link:
jdsu.com
I'll turn to one of the better JDSU number crunchers at the Fool, Phil Weiss, who has covered the stock for the Rule Maker portfolio since the decision was made earlier this year to add JDS Uniphase. I posted this link last week, but here it is again for those who missed it:
fool.com
•Revenue Growth = 173% y/y and 33% sequential
•Gross Margin = 50.3% (within management's guidance of 50-51%)
•Net Margin = 21.8%
•Cash-to-debt ratio = 0 JDSU has no debt on the balance sheet and $1.1 Billion in 'cash'
•Foolish Flow ratio improved to 1.33 from 1.54 a year ago and 1.63 last quarter
•Cask King Margin = .0007%
Phil's comments on the Cash King Margin:
"JDSU's CKM is significantly less than its net margin because the company is funding its tremendous growth opportunities. I have no objection to seeing JDSU close to cash flow neutral. This is a company with tremendous opportunities. The fact that it's able to fund these opportunities from operating results indicates fiscal responsibility, and I certainly want to see it take advantage of as many of these opportunities as it can manage." -- Phil Weiss at The Motley Fool
I also tend to use qcom as a measuring stick with everything else I hold and have a difficult time justifying some of the valuations.I also find jsdu earnings quite difficult to absorb due to all the different charges which for the time being is on my watch and wait list. If you are heavily invested in jdsu some form of hedging(some covered calls or sale of common for leaps) or lighting up on a portion would not be a bad idea.
Once again, if we are talking balance sheets - let's see some data to back up the advice of 'lightening up' and comparing everything to Qualcomm as a yardstick. Each individual investment must looked at on a unique basis. If you listen to the JDSU conference call, one cannot help but be somewhat impressed by management's forward guidance of raising sequential quarterly growth to the teens from 15%, fiscal year to 90% and the report that book to bill and backorders are at all time highs. They also address their strategy of coping with this nice growth problem which is highlighted in the Fool link above.
I'm not saying there are not risks involved when valuation concerns are raised for any of our investments, but looking at the balance sheets of Siebel, Cisco, JDS Uniphase, EMC, Brocade and on down the line certainly is a valuable tool for all of us as investors as we chew the fat about gut feelings, what's moving up, what's moving down, diversity in a portfolio and giving any advice.
Regardless, I hope some of the above information helps when you mention that you have a difficult time absorbing the JDS Uniphase earnings.
Back to one of my earlier posts about all royalty not being created equal, if you dig back in Dell's or Compaq's quarterly numbers for the 1994 to 2000 period or even before that, you're not going to encounter any numbers that ever qualified them for Rule Maker status. The net margin was always in the 6 to 9% range and the gross margin in the PC OEM business simply is not in the league of at being at least 50%. Likewise, the recent numbers that EMC has in the past few quarters puts it in a much better royalty class that now qualifies it for the Rule Maker criteria.
I've never run the numbers on Sun, so I have no idea what their balance sheet looks like when compared to JDSU and EMC. We've always known that some royalty are better than others, but the PC OEM's are probably not the best to be comparing all stocks to when using the statement "hold 'em lightly" in reference to all royalty candidates from a balance sheet perspective - especially when evaluating the large-caps like EMC, Cisco, Intel, Oracle, JDS Uniphase and Microsoft. I may be way off track, but I think that combining the fundamental analysis of the business along with our gorilla gaming criteria can help us to make more astute decisions on Kings and royalty plays using the FA for those that have chosen to have any of them in their portfolio.
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