UBS Warburg - Wall Street Tech
Joseph Wolf James Hillier
212.821.5150 212.821.5138
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JDSU: COMMENTS ON RECENT WEAKNESS
Summary:
JDS Uniphase shares have been weak lately, even during periods of relative strength for the rest of the tech sector. We believe JDS is on track to meet or exceed our fiscal 2Q01 revenue estimate of $920 million in revenue and proforma EPS of $0.20. We also believe that investor concern has shifted from the December quarter to the March
quarter, especially as investors take a cautious approach to carrier spending and the seasonality of JDSU's large OEM customers like Nortel and Lucent. We have been suggesting a cautious approach to "jumping into the market" in the current environment, but at current valuations see opportunities for investors to start rebuilding positions with JDS.
Highlights:
December looks good
When JDS reported its fiscal 1Q01 and gave guidance for "mid- teen" sequential growth, we believe that the market was somewhat skeptical of this target given weakness at Lucent and inventory issues at Nortel (which was down sequentially in optical in the September). We built our
model for fiscal 2Q01 with 17% revenue growth assuming that combined sales to these two customers would be essentially flat as Lucent is in a turnaround situation and there is some uncertainty with regard to Nortel's inventory and how that cycles through to JDS. We believe that the strength of the overall optical market, and JDS's broad customer base will allow it to show its nimbleness in meeting demand across the sector and highlight the investment thesis of owning the arms merchants to the whole optical market.
What about March?
We now believe that investor concern has shifted to the March quarter.
We see investors concerned about: a general economic slow down, carrier spending and the return of a traditionally seasonally slow March quarter to the telecom sector, component supplier visisbility into end users, and that the build out of the optical network is no longer accelerating. These concerns have only been heightened by the numerous
"pre-announcements" in the tech sector during December. Our view is that no matter what the absolute carrier spending looks like, there will be a shift towards higher growth segment including optical networking. In addition, even as portions of the optical network (the long haul) are no longer accelerating, we see several trends that will
continue to fuel growth for JDS and the rest of the optical components sector. These include the build out of the metro optical network, the first wave of optical switching and optical add/drop, and the growing trend among OEMs to rely more heavily upon their suppliers for optical modules (ie, even if long haul slows, JDS sales to the long haul could
grow more rapidly).
We agree that the March quarter will be challenging, but we also feel that this challenge is now reflected in the stock price, with JDS trading at about 40-45 times our CY2001 EPS estimate. With our model reflecting a revenue growth opportunity of 120% in fiscal 2001, we would view these valuations as compelling entry points for those investors looking to build positions with the long term enablers of the optical network. Finally, with the announced push out of the SDL (SDLI-$142.19-NR) merger we believe that the general consensus is that the deal will close in January, and that is less of an issue in the stock price. |
