From the JDS/Uniphase thread, you can extrapolate the similarities to MRV's optics. Wish we had the big league coverage some of these guys have.
JDSU: Raising Rating to Buy from Outperform
Salomon Smith Barney
Wednesday, July 14, 1999
--SUMMARY:--JDS Uniphase--Connectors & Other Components *We are raising our rating
to Buy (1H) from Outperform (2H). *Business continues to look very strong, with an indication
that the combination is creating new opportunities. *We are capitulating to the notion that
JDSU should trade at a multiple beyond its earnings growth rate for several reasons, detailed
below. *We are maintaining our $215 price target, which uses a 55x-60x multiple on our
calendar 2001 estimate. --EARNINGS PER
SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 06/99 EPS $0.27A $0.32A $0.39A $0.42E $1.39E Previous 06/00 EPS $0.47E $0.50E
$0.54E $0.59E $2.10E Current 06/00 EPS $0.47E $0.50E $0.54E $0.59E $2.10E Previous
06/01 EPS $0.69E $0.74E $0.79E $0.87E $3.10E Current 06/01 EPS $0.69E $0.74E $0.79E
$0.87E $3.10E Previous 06/02 EPS $N/A $N/A $N/A $N/A $N/A Current 06/02 EPS $N/A
$N/A $N/A $N/A $N/A Footnotes:
--FUNDAMENTALS-------------------------------------------------------------- Current
Rank........:1H Prior:2-H Price (7/13/99).....:$163.31 P/E Ratio 06/00.....:77.8x Target
Price..:$215.00 Prior:No Change P/E Ratio 06/01.....:52.7x Proj.5yr EPS Grth...:0.0% Return
on Eqty 99...:17.2% Book Value/Shr(00)..:3.85 LT Debt-to-Capital(a)0%
Dividend............:$N/A Revenue (00)........:954.30mil Yield...............:N/A% Shares
Outstanding..:87.0mil Convertible.........:No Mkt. Capitalization.:14208.0mil Hedge
Clause(s).....: Comments............:(a) Data as of the most recently reported quarter.
Comments............: --OPINION:------------------------------------------------------------------
RAISING RATING TO BUY FROM OUTPERFORM--MAINTAINING $215 PRICE
TARGET We attended the opening of JDS Uniphase's new facility in Ottawa yesterday.
Based on our impressions for the visit, and the fact that there is now 32% appreciation to our
$215 12-month price target, we are raising our rating to Buy from Outperform. Last night after
the festivities, the company announced a 10 million share (post-split--a 2-for-1 split is in the
works) equity offering, 22% of which is expected to be in the form of secondary shares. The
company should raise over $600 million, and we believe the deal--before use of the
proceeds--will be neutral to slightly accretive to earnings. USE OF PROCEEDS:
ACQUISITIONS JDS Uniphase continues to pursue acquisition opportunities, and reiterated
its aversion to dilution (excluding goodwill expense). In partial explanation for the transaction,
management noted that larger companies that spin-off divisions often want cash instead of
stock. We speculated to management that a large, vertically-integrated OEM may spin-off its
fiber-optic components division, and we received no denials. Whether or not this sort of a
transaction is looming, management believes that there are plenty of potential targets that
would offer the company new technology, market share, and/or capacity. THE BUSINESS
CONTINUES TO ACCELERATE During the presentations, management remarked that the
combination of the two companies had prompted discussions with customers that would likely
lead to significant new business. We believe that the demand we identified earlier (see our
note following SUPERCOMM date 6/10) for Sonet line cards of 2x-3x and going
higher--which we view as a key indicator of JDS Uniphase's business, and this type of growth
rate was confirmed yesterday by one of JDS Uniphase's top engineers--is manifesting itself in
accelerating growth for both companies. Accompanying its announcement of the offering,
management gave preliminary results for the quarter (fiscal fourth). Revenues at Uniphase
should be about $87 million, which, excluding the impact of the Philips acquisition about a year
ago, is about 55% growth on the top line. The pro forma revenues of the combined company
should be about $190 million, which means that JDS alone grew at about 100% this quarter.
On the bottom line, the pro forma EPS should be $0.46, up about 83%, versus our estimate of
$0.42. VALUATION We recently raised our pro forma estimates, forecasting top-line growth
of 66% in FY2000, 50% in FY2001, and about 50% bottom-line growth for both years. JDSU
is now selling at 64x our calendar 2000 estimate of $2.54. Our target uses 55x-60x on our
preliminary estimate of calendar 2001, up 50% over 2000. We are capitulating to the notion
that this company should trade at a multiple beyond its earnings growth rate for several
reasons: 1. Estimates will likely increase because of new design-wins that we believe will
multiply the growth of this already fast growing market. 2. JDS Uniphase is unique--there is no
company in the component area with its scale and breadth, and it is one of the few pure ways
to play fiber-optics outside of the service providers. It's also a superb technology company,
collaborating on a design level with many systems OEMs, and necessary to their efforts in
optics. 3. The company has outstanding operating profit margins of about 30%, which look
sustainable in the near and intermediate term based on the growth of the market and the high
barriers to entry. Point 2 is worth expounding upon. What this boils down to was summarized
in a slide for the upcoming road show. JDS Uniphase points out that it is the only merchant
fiber-optics company with all of the following capabilities: *In-house skills in semiconductors
*Volume manufacturing of optical components *A formidable patent portfolio (800 major
patents) *Experienced scientists *The ability to do integration based on current products In
other words, if a company is deficient in any of these skills now, it's not likely to be a serious
player tomorrow. Corning and the vertically-integrated telecoms (Lucent, Nortel, Alcatel, and
Pirelli) are the only companies that approach this, but most are lacking at least one piece of the
puzzle. RISKS There are technology and competitive risks to all of JDS Uniphase's businesses,
but there are so many areas in which the company participates--virtually every component and
module needed for fiber-optic transmission--that the whole product line is what we emphasize.
Particularly, because tomorrow's hybrid devices are the destination of the road map. RYAN,
HANKIN, KENT FUN FACTS Peter Hankin of the consulting firm Ryan, Hankin, Kent gave
a presentation at the event that was crammed with George Gilderesque prognostications
regarding bandwidth demand--all of which looked reasonable--and also made some compelling
points. RHK predicts T3 replaces T1 as the defacto speed for business and a rapid adoption of
T1 equivalence in the residential markets, with a forecast of 10 million North American
high-speed lines to the home by the year 2002. In 4 years, RHK predicts, we will see a 30x
increase in traffic in North America. Network operators require 5-15 times capacity to run
data reliably, as opposed to 25%-30% excess capacity for voice. And traffic is growing so fast
that operators order new equipment when they reach 35% of capacity! All of this is driving the
all-optical network. RHK's estimates for the size and growth of the markets in which JDS
Uniphase participates appeared on the slide show that was prepared for the impending road
show. They estimate that the market today is $5.5 billion (up from an earlier forecast of $3.1
billion) and going to $21.3 billion in 2003. That's a CAGR of 40%. Not too many markets are
growing at that pace. JDS Uniphase should take share from captive operations, as well. RHK
predicts that the internal/external percent of this business goes from 50/50 to 30/70 in this
timeframe. WE TALKED TO SCIENTISTS We talked to many scientists and listened to
presentations by two of the company's leading technologists. The presentations stepped
through the current products, but heavily emphasized the hybrid products of tomorrow. Clearly,
with channel counts increasing, real estate on the board is becoming a prime consideration,
along with other factors, which are all driving hybridization. New products: *Interleaver, which
takes a 100 Ghz filter demux and turns it into a 50 Ghz demux using the same filters -
prototype *Amps and integrated passive modules for amps - in production *Hybrid demuxes -
available *Transmitters - in production *Wavelockers - in production *Tunable lasers - one
year out *10 Gbps EML - demo *semiconductor op amp - prototype (?) *reconfigurable
add/drop - in production Potential modules forthcoming from the combined company: already in
production are amps and transmitters. Other potential devices are polarization transformers,
optical cross-connects, OADMs, power management modules using voltage-controlled optical
attenuators, configurable OFBGs, WDM for CATV transmission. Management emphasized
that time-to-market considerations are driving a need for the multitude of start-ups in the
WDM systems business to purchase complete optical assemblies. The large telecoms also
want these devices. Eventually, all functionality will be on one device, including tunable lasers,
detectors, modulators, demuxes, and switches. |
