Bulls back off from JDS
Third quarter 'risky': Analysts cite slowing demand for downgrades
Scott Adams
Financial Post
JDS Uniphase Corp. has been knocked down by a couple of one-time bulls the past two trading days.
Optical component makers such as JDS have had booming revenue growth this year because demand for their components
has outstripped supply. But the two analysts are now indicating that this market environment is easing.
The stock was downgraded to "buy" from "strong buy" by both Raj Srikanth, analyst at Deutsche Banc Alex. Brown, and
George Hunt, analyst at Wachovia Securities. Mr. Hunt also cut his target to US$85 from US$170.
In checking with optical components customers, Mr. Srikanth has found that lead times for orders of so-called passive
components have fallen to four to five weeks, from about eight weeks.
"This is a dramatic change in what we were hearing from optical systems vendors only two or three weeks ago and is the
basis for our concerns," Mr. Srikanth wrote to clients yesterday.
About 60% of JDS Uniphase's revenue came from passive components and modules last quarter, with the remaining revenue
coming from active components and modules and non-telecommunications sales, he said.
JDS Uniphase (JDSU/NASDAQ) was the second-most traded stock on the Nasdaq yesterday, gaining 15/16 to US$41 7/8.
Word about the Deutsche downgrade was in the market on Friday, though the research note is dated yesterday. The
Wachovia downgrade came on Friday. Both analysts have had "strong buys" on the stock since at least May.
JDS Uniphase fell US$2 1/8 on Friday and had a bad week, falling almost 30%. The stock closed the week at its lowest point
in more than a year and is now down 71% from its peak close of US$146 17/32 last March.
Mr. Srikanth believes JDS can still meet Street expectations for its second quarter ending Dec. 31, but says the third
quarter looks risky.
Mr. Srikanth did not, however, cut any of his forecasts.
An increase in the number of optical components suppliers and an increase in manufacturing capacity among the older
suppliers could be leading to an easing in lead times, he said.
Also, Lucent Technologies Inc. (LU/NYSE), which has been going through increasing financial difficulty, was one of JDS
Uniphase's top three customers last quarter, Mr. Srikanth said.
Mr. Hunt is concerned also about the weakening U.S. economy and increasing competition to JDS Uniphase, saying that
pricing of optical components is falling faster than anticipated.
He also believes that JDS Uniphase can meet expectations for its second quarter, but he cut his expectations for the
second half of fiscal 2001 and for fiscal 2002.
"Although we believe JDSU deserves [a valuation] as the industry leader in the optical components marketplace, the stock
is still not cheap, and the stock market has historically been very hard on high multiple stocks following any less than
positive news," Mr. Hunt said.
Consensus is earnings of US19¢ a share for the second quarter and US21¢ a share for the third, according to First
Call/Thomson Financial.
Joseph Wolf, analyst at PaineWebber, kept his "buy" on JDS Uniphase yesterday, while admitting that the March quarter
may be a challenge. But the challenge is "now reflected in the stock" and he suggests that now is a good time to start
building long-term positions in the stock.
While lead times for some of the more mature optical components may have eased, customers are switching to newer
optical components, Mr. Wolf said. |
