re: JDSU and the Optical-Components Industry
<< JDSU and Corning will both make us wait, maybe until late 2003 or early 2004. I think. >>
>> JDS Rules a Fallen Empire
John Filar Atwood
Equity Research Columnist
Multex Investor
2002-09-07
With scant competition in the faltering optical-components industry, JDS is suddenly sitting pretty.
Things are suddenly looking up for JDS Uniphase (JDSU), a New Economy superstar whose stock now trades some 98 percent below 2000 highs.
That's because the near collapse of its industry—optical components—has driven off virtually all competition, leaving JDS in control of a $2.3 billion market. That the optical market clocked in at $7 billion just two years ago is beside the point.
Agere Systems (AGR.A) recently announced that it will exit the optical space, joining Nortel (NT) and ADC Telecom (ADCT) on the list of industry defectors.
The departures of both Nortel and Agere are startling because they once held the number 2 and 3 market positions, respectively, behind JDSU. And now there are rumblings from Corning (GLW), the fourth-largest optical-components company, that it may abandon its telecomm business as its optical sales have plunged to a paltry $25 million per quarter.
Like most of what ails the telecomm industry, the root of the optical mass exodus is lower carrier capex. "Carriers view spending on optical components as discretionary," Ping Zhao of Sanford Bernstein tells Multex Investor. "With capex falling, spending in this area has stopped."
That made the optoelectronics business a losing proposition for Agere. The company's optical unit was the main reason behind its recent losses from operations and high break-even revenue rate of $700 million.
Agere said that lower spending created excess capacity in the core network and has delayed the deployment of high-speed technologies and undersea systems. With carriers focusing on cost reduction and wavelength management technologies, other new systems are not being developed as quickly as Agere had expected.
The company will discontinue or sell its optical assets by next June, a move that isolates JDSU atop the troubled optical sector.
But JDSU may not be alone for long.
Chip titan Intel (INTC) wants in, and recently hired a chief technology officer to lead its optical-components division. With so many assets now available, the company may be able to build market share relatively quickly.
So far, however, Intel is taking its time. Nortel's assets have been on the block since May, but Intel hasn't made a move.
Zhao believes Intel is waiting for the Nortel assets to lose even more value. "They think that if they don't buy right away, the assets will be even cheaper as time goes on," she said.
She thinks that Intel can become a credible competitor to JDSU within four years through strategic acquisitions, and that the two companies will probably emerge as the two dominant players when the industry recovers.
That recovery, in Zhao's opinion, is just a matter of time. "The optical market will not keep shrinking," she said. "You cannot have a healthy telecomm industry without a healthy optical-components sector, because optics is an integral part of the entire telecomm picture."
It is also the cheapest way to move data over long distances, and until a less-expensive alternative comes along, carriers will spend on optics once they decide to reopen company coffers.
Credit Suisse First Boston's Max Schuetz expects optical components to be among the fastest-growing segments in communications in the near future. The inventory overhang will end early in 2003, he believes, and there will be a gradual migration towards multi-wavelength systems.
As a result, Schuetz sees a 23 percent compound annual growth rate for optical component sales.
And there waiting to reap the rewards of that growth, with little competition in sight, will be market leader JDSU. Several analysts, including Thomas Weisel's Jeremy Bunting and Griffiths McBurney's Dayle Hogg, recommend that investors buy into an eventual market recovery while JDSU shares remain depressed.
John Filar Atwood is the Managing Editor at CCH Washington Service Bureau. <<
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