JDSU stabilization comment was a screen
by: clyons69 (40/M) 09/24/01 10:47 pm
Msg: 36222 of 36239
In a press release this morning, JDS Uniphase indicated its sees quarterly revenues at $325 million for the September quarter. We think this is slightly below what the Street was expecting. In addition, management said it believes the company is beginning to see the early signs of stabilization at levels from which the industry can grow in the future. If true, the comment is constructive; but we also point out JDSU's sales are now forecast to come in down 45% sequentially in September, and we don't think the Street was expecting this revenue decline to repeat in subsequent quarters. As a result, beyond face value, we think the stabilization comment has little new
fundamental meaning. Furthermore, with capital expenditures likely to decline dramatically again next year, including strong declines in metro systems spending, we think it is unlikely JDS Uniphase will see strong sales
growth next year. Add in the stock is trading at a PE over 100x CY2002 earnings, and we think investors have time before stepping up to the plate on this name. The following points highlight our position:
Our Sources Continue To See Eroding End Market Conditions, Suggesting Little Opportunity For Growth. Equipment sales growth outlook for 2002 is negative in metro as well as in long haul. In our industry note Eroding CAPEX Increases Risk To Revenue/Earnings At Equip. Companies published two weeks ago, we indicated metro equipment spending was likely to decline over 20% year over year in 2002. We have reprinted the key points of this analysis as an appendix to this report. This change in metro spending comes on top of already expected strong declines in long haul equipment sales. Both ILECs and IXCs have indicated they have more capacity than needed in many of their network links. Combine this with a slowing economy, which puts pressure on bandwidth demand growth, and we find it difficult to construct a case where optical component sales rebound aggressively next year. We recognize, excess inventory is masking the actual rate of sales growth in photonics. When this works off, photonic sales should stabilize, if not up-tick, but we see this as a temporary effect set against the back drop of weakening telecom system sales.
JDSU stabilization comment - II
by: clyons69 (40/M) 09/24/01 10:52 pm
Msg: 36224 of 36239
Believe Valuation Has Not Yet Reached attractive Levels. We think investors favor price-to-earnings as the preferred method of valuation.
Last Friday, the shares closed at $5.36 per share. Based on its recently filed 10K, the company had $1.8 billion in cash and short term investment on the balance sheet, or roughly $1.30 on a per share basis. Excluding
this amount, and using our CY02 earnings forecast of $0.04 per share, the company was trading at a price-to-earnings level of roughly 102x forward earnings. This is near the upper end of the company's historical trading range before the 'boom' years of 1999 and 2000. Furthermore, we recognize, some investors may consider 2002 a 'trough' earnings period and would prefer to evaluate the company based on 'run rate' earnings. Our Dec 2002 quarterly revenue forecast is for $480M, annualized that's $1.9 billion in
potential sales for the 2003 period.
Similarly, our net income multiple for the company for the December 2002 quarter is roughly 5% of sales. This works out to roughly $0.07 per share in annualized December quarter 2002 earnings, after factoring in the company 1.4 billion share base. Using this as the run-rate earnings base, the company is currently trading at a price-to-earnings multiple of 58x, exceeding cash. That's better, but still not cheap.
Semiconductor Stocks Suggest Valuation Is Compelling, But JDS Uniphase Is Not A Semiconductor Company. We Think Using These Comps Can Be Misleading.
On a price to sales basis, JDS Uniphase trades at 4.6x 2002 sales. AMCC and PMCS trade at roughly 10x and 7x forward sales, respectively. Based on these comparisons, JDS Uniphase looks attractive. Furthermore, if JDS
Uniphase was a semiconductor stock, management's comments would warrant an
aggressive look at the name. However, JDS Uniphase is not a semiconductor company. Once the psychological boost of today's comments wanes we would not be surprised to see the share price again sag. Semiconductor stocks are
cyclical. Often the right time to buy is when the early positive signs of sales stabilization emerge. The reasoning is the relatively high fixed cost structure of semiconductor stocks results in substantial earnings leverage coming out of the trough, leading to rapid share price recovery.
Although optical components is likely a cyclical business, we don't see the same earnings leverage at JDS Uniphase when compared to semiconductor companies.
Thesis Unchanged -- Maintain Neutral Rating Against Backdrop Of Likely Weakening 2002 Telecom Equipment Sales. In light of these issues, our position on this name is unchanged. We expect the company's sales may
stabilize exiting this year. However, we remain extremely nervous about carrier capital spending declines in 2002, in both metro and long-haul, particularly in light of a weakening economy. Since the events that occurred on September 11th, JDS Uniphase's shares have not seen as much downside pressure as other names in technology, and the stock is not inexpensive. On the other hand, we recognize, JDS Uniphase is going to survive this downturn.
The company has a strong balance sheet, solid products and is not burning tremendous amounts of cash. From our perspective, we think investment in this name is a question of 'when,' not 'if,' but set against the backdrop of likely weakening end-market conditions, we think investors have ample time to continue to evaluate this company before stepping up to the plate.
APPENDIXHIGHLIGHTS OF METRO CARRIER SPENDING SURVEY
From Sept. 11th Eroding CAPEX Increases Risk To Revenue/Earnings At Equip.
JDSU stabilization comment - III
by: clyons69 (40/M) 09/24/01 10:55 pm
Msg: 36226 of 36239
companies.
Our Conversations With ILECs Suggest Street CAPEX Forecasts Are Too High. Qwest may have beat us to the punch, but we know they are not alone in cutting capex. Our survey of the other major ILECs suggest all three, VZ,
BLS and SBC are poised to lower capex for 2002 to levels below current Street expectations. Our forecasts are below the Street. We are looking for Capex at the ILECs to drop 10% year over year to $39.5 billion in 2002 from $44.0 billion in 2001. The Street seems to be expecting more of a flat spending level at the ILEC level. However, our conversations with all the ILECs not only suggests spending is likely to approximate our forecasts, but the bias is for further cuts.
We Think The Cuts May Take Another 15%-20% Out Of Metro Equipment Spending Or About $2B Next Year. In particular, our carrier conversations suggest the majority of the cuts are likely to come out of wireline equipment spending. ILEC carrier Capex budgets breakdown into essentially three buckets: 'discretionary spending,' including wireline equipment, 'wireless,' if applicable, and 'maintenance.' VZ's discretionary spending in 2001 was roughly $5 billion. SBC's budget was roughly $4.5 billion. BLS is likely a
bit smaller than the other two, perhaps $3 billion. Q's discretionary spending is a bit skewed relative to the other three because of its wholesale business, but the US West portion is likely a couple of billion. All totaled that's roughly $14-$15 billion of metro equipment focused spending. Our Telecom Services team thinks this is likely to come down 15%-20% in 2001, reducing the total metro capital equipment expenditures next year by roughly $2 billion.
What's Shaping Up Is Metro May Not Come To The Rescue For Optical Telecom Equipment And Components Players. We recognize ILECs do not spend as much on optical as long-haul players, however by our analysis ILECs are a key driver
of the 2002 equipment outlook. Slower metro spending on access and metro telecom gear slows the need and deployment rate for high bandwidth optical equipment. Strong Capex cuts at ILECs make it harder to envision metro as a
recovery driver for optical equipment and components. This was the last leg of our constructive thesis. Without aggressive growth in metro optical systems, recovery timing for the photonics industry slows. As a result, we
are lowering our rating to Neutral from Buy
It's Early, But An Informal Survey Of Major Enterprises Suggests IT Budgets Are Biasing Down For 2002 Another Potential Negative For Equipment.
September may prove to be a pivotal month as capital budgets are adjusted to reflect the weakening conditions in Europe, Japan, and Asia over the last couple of months. We have spent some time conducting an informal survey of large enterprises to understand the direction of their IT spending. In our
view, IT spending is a good indicator of the future direction of datacom and telecom equipment sales. Most forward looking IT budgets are set in the September period. As a result, our data is not definitive, most of the
companies were in the process as we contacted them.
JDSU stabilization comment - IV
by: clyons69 (40/M) 09/24/01 10:59 pm
Msg: 36227 of 36239
However, our conversations clearly indicate the bias is for flat to down IT spending next
year. Moreover, anecdotal evidence suggests industry layoffs and tighter applications development budgets in 2H of 2001 are translating into a diminished need for data communications equipment. It appears LAN carrying capacity, in a number of cases, are sufficient for intermediate term enterprise needs. Our survey of a number of the major banks suggests budgets likely to come in down 10%-15% year over year. At least one bank expects to repurpose old equipment to meet any demand growth, and is not expecting to add any new access lines from carriers in 2002. Our survey of major industrial manufacturers yielded mixed results, Companies like GE are
expected to grow spending, but even there they are likely to moderate the pace, others in the segment are likely to cut. We are hearing the CFO is taking a much more proactive role in the budgeting process than in the past. Further, we are hearing the process is changing. In many cases once set budgets are now open to review on a monthly or quarterly basis with the bias toward keeping spending in check.
Long-Haul Has More Cuts To Come--We are Looking At Least A 23% Decline In CAPEX Next Year With Long Haul Down Over 30%. In aggregate across all service providers, we are forecasting a 23% decline in spending in 2002 to $70.7 billion from $92 billion in 2001. The deepest cuts are in the long haul segment, down 30% to $18.7 billion in 02 from $26 billion in 01, which includes AT&T, Sprint, and WorldCom; and emerging Network segments, down 45% to $8.1 billion from $$14.8 billion, which includes Global Crossing, Broadwing, Level 3, and Williams. We are also looking at a 45% decline in the CLEC spending to $2.5 billion in 02 from $4.7 billion in 01, but this is small in absolute dollars since the segment has all but collapsed with spending still recognized at Allegiance, Focal, Adelphia, McCleod, XO, and RCN. For equipment and components makers, including optical, this suggests more pressure is yet to come. We recognize, however this issue is well discounted by the Street. |
