JDSU is on my buy-list, because I think tech will continue to be where the growth is, and within tech, the growth is shifting from computing to communication, and JDSU dominates one niche of that. But I'm having a hard time deciding what I should be willing to pay for the shares. And telling me, "it's all relative" is not useful.
Yes, I agree that you cannot assign an absolute "value" to a company. The stock is worth what the market says it is. However, that valuation, over time, will tend to fluctuate within a certain range. For most companies, you can say things like: "over the last 10 years, the stock has been (90% of the time) been between a PE of 10 and 30 (or a P/S of 1-3, or some other valuation metric). And that valuation range is controlled, ultimately, by the reliability and growth in future earnings. And you can use that range to predict the future, which is why it is useful. A lot of investors, during the 1995-2000 time period, dismissed valuation arguments, by saying, "if investors are willing to pay a PE of 200 for this company, then that proves it's worth that much". And they bought and held the stock when it was above the top end of the valuation range, at a totally unsustainable level.
So, my discussion of PE and book value is an attempt to find out what JDSU's valuation range will be, going forward, so I can try to buy at somewhere near the lower end of that range. I'm not really defending GAAP earnings. Mainly, I'm dissing pro forma "earnings". I've been doing this for years, long before it was fashionable. When a company pays for a lot of its costs through acquisitions (getting employees, getting new products, getting patents, building market share, entering new markets, etc, etc.), and then uses pro forma Creative Accounting, to pretend those costs never happened, I don't see how an investor can use those numbers to value the company.
Per my (not-so)-hypothetical example: at the time the company made the acquisition, they paid in stock, stock that the market said (at that time) was worth 10B$. Instead of making the acquisition, they could have raised 10B$ in cash, in a secondary stock offering. And, if they had just sat on that cash, stockholders would be 9B$ richer today.
In fact, this is exactly what a lot of companies did. In the go-go mania years, a lot of Old Economy companies saw an opportunity to distribute wealth from the Exuberant to the Rational. Here's how they did it: First, they set up a dot-com subsidiary. Then, they spun it off, and did IPOs at absurd prices. The parent (and officers of the parent, and all sane investors) sold their shares of the dotcom (or telco startup, or network equip, or whatever the market loved at the time). Today, many Old Economy companies are quietly buying back those shares, at prices 1/10 or 1/100 of the IPO price, re-acquiring their subsidiary.
In effect, JDSU's acquisition methods, for the last several years, has been the reverse of this. They bought those tech shares when they were most overvalued. They took the other side of the trade. It's a zero-sum game (actually, worse than zero-sum, because of all the transaction costs), so someone had to be the bag-holder. The winners took their money from someone, it had to come from somewhere. They took it from JDSU shareholders. And, if you use pro forma accounting, you just haven't realized this yet.
You said, "People threw money at JDSU because it was growing..." Could you define growth for me? I see sales and market share growing. I don't see profits growing (real profits, with all the costs paid for). This is phantom growth, like the way AMZN does it. Or those Japanese companies in the 1980s, who went after market share and ignored profitability.
PS: OT: The market is a good way to set prices, when the market is free and fair, with informed buyers who have choices (including the choice not to buy). In some markets this isn't possible, and so prices should be regulated. This, BTW, has been the basic policy of the U.S. government for the last 100 years, since the first Rooseveldt (a Republican). When such markets are left unregulated, the result is monopoly pricing (health care), or chaos (California electricity market). Think about my example of the guy in the ER. |
