Many investors tend to mistakenly extrapolate whatever the current situation is into the future. That blinds them to deteriorating situations or improving ones. They just keep projecting what has already happened into the future.
But, the fundamentals of JDSU are in the midst of a significant turnaround. They are "cost reducing the past" by eliminating low margin, low growth products, closing facilities (from 40+ during the boom to a projected 8), using contract manufacturers in Asian locales wherever possible and moving their own assembly operations to China for other products. These measures alone are projected to reduce costs by at least $20 million per quarter.
They are moving up the optics component vendor "food chain" by producing more complicated (and higher margined) "subsystems" instead of just selling components. They are diversifying in a major way with their large acquisition of Acterna, a test and measurement company, which is expected to increase revenues by over 60%. Unlike most optical component companies which have very low or even negative gross margins, Acterna's revenues are at an impressive 50% gross margin and non-GAAP EBITDA of 11% of revenue. JDSU has also done two other smaller diversification acquisitions and plan more in the future. They expect their already announced acquisitions to contribute between $10 and $14 million to EBITDA per quarter.
The past year has shown a noticeable increase in revenue in this sector after years of revenue declines. The industry recovery is well underway. At the same time, many of JDSU's competitors are still suffering with negative gross margins and experiencing large quarterly cash burns. They have engaged in repeated financings and are unlikely to be able to go to the "well" much more. Consolidation in this sector is in full swing which can only be beneficial to the largest player with the strongest balance sheet.
Once the Acterna acquisition closes, which is scheduled for July, future management guidance is likely to be significantly better. Analysts estimates and ratings likely will be raised. There is no reason to expect continued decline in JDSU's stock at this time. To quote the CEO, Kevin Kennedy, they are "reinventing" JDSU.
Cathi |
