JDS trumpeted as 'the next Intel'
Analysts predict the fibre-optics firm
will profit from mushrooming industry demand
ANGELA BARNES
Investment Reporter; Source: Bloomberg Financial Services;; Datastream; Globe Information Services
Friday, September 3, 1999
Analysts can't find enough nice things to say about JDS Uniphase Corp., a company whose stock has already registered gains that many
investors can only dream about.
"It is a phenomenal company," enthuses one market watcher. A "terrific company with great long-term prospects," trumpets a second. The
"next Intel" proclaims another, who, like most of his counterparts, still urges investors to purchase the shares of this market darling even after
the recent steep runup in price.
In just five weeks, shares of JDS, which was formed early in July from the merger of Nepean, Ont.-based JDS Fitel Inc. and Uniphase Corp.
of San Jose, Calif., rocketed from $118 to $173.55 on the Toronto Stock Exchange. Since then, they have eased back to $160.25.
(The shares that trade on the TSE are issued by JDS Uniphase Canada Ltd., a holding company wholly owned by JDS Uniphase. As such,
the shares, which are exchangeable into JDS Uniphase shares on a one-for-one basis, are deemed Canadian content for registered retirement
savings purposes.)
The recent rise may be impressive, but it pales by comparison with the advance in JDS Fitel shares before the merger. The past October, JDS
traded hands for less than $15.
Analysts attribute the latest jump in the stock price to several factors, including last week's announcement that San Jose, Calif.-based Cisco
Systems Inc. was spending more than $7-billion (U.S.) to acquire two small companies -- Cerent Corp. and Richardson, Tex.-based
Monterey Networks Inc. -- in an industry that is closely related to that served by JDS.
By far the more expensive of the two, Cerent of Petaluma, Calif., has just 287 employees and revenue of $9.9-million in the first six months of
fiscal 1999.
Investors bid up the prices of related stocks in the wake of the Cisco news, including JDS shares. The market was impressed by the hefty
price that Cisco, which is regarded as a savvy acquirer, was willing to pay "just to get their foot in the door in the optical networking business,"
said John Wilson, an analyst with Bunting Warburg Dillon Read Inc. He sees JDS as "a great way to play this bullish long-term view on
spending in fibre-optics systems."
The merger with Uniphase has also helped the stock price since it united a rapidly growing Canadian company and a U.S. company with a
stock listing in the United States where there are many more investors. A recent road show boosted the stock too.
Of all those factors, it is the market growth potential of optical networking that analysts following JDS stress most.
Fibre optics is "the sweet spot of what everyone is saying is the next big spending spurt in the telecom world," Mr. Wilson said.
And JDS is right in the thick of that action. It makes the building blocks that are incorporated into fibre-optic networks and it numbers among
its customers all the big players in that field, including Brampton, Ont.'s Nortel Networks Corp. and Lucent Technologies Inc of Murray Hill,
N.J.
Demand for fibre-optic networks is mushrooming and JDS is benefiting from a sharply rising demand for its products.
Moreover, analysts take as a given that JDS will use its large war chest to aggressively expand its sphere of influence. They expect it will use
the funds to either bolster market share, purchase new technology or pick any businesses that the big vertically integrated high-technology
companies may shed.
"Anything they buy is going to going to be accretive," said BenoŒt Chotard, an analyst with L‚vesque Beaubien Geoffrion Inc.
JDS already has a predominate position in the fibre-optic network component sector. "I think JDS Uniphase is 50 per cent bigger than their
next three competitors combined," Mr. Wilson said. "They're the gorilla."
That fact makes them particularly attractive to U.S. investors, who are willing to pay a premium for such sector leadership, analysts say.
The company recently issued additional shares both in Canada and the United States, and is expected to use the $602-million in proceeds for
acquisitions and capital expansion in existing facilities.
"Their biggest problem -- and it is a great problem to have -- is that all their factories are full," even though they have already doubled and
tripled capacity, Mr. Wilson said.
Other factors also contribute to analysts' upbeat view of the company. JDS has a "deep and strong management team" in both Canada and the
United States, said portfolio manager Duncan Stewart, who has been a JDS fan ever since he started the Navigator Canadian Fund in
October, 1997. (JDS is the second-largest holding in the fund at 5.6 per cent.)
And that management has the leading technology, he said.
The recent rally pushed JDS's price/earnings multiple to a relatively high level, but then, high multiples are common in high-tech sectors.
With JDS "you've got a company growing at 100-per-cent growth rates, yet trading at [lower multiples] than its peer group," said Mr.
Stewart, although he added that the competitors are priced for perfection.
Another analyst put the high multiple in perspective by saying investors need to look beyond what the company is today and visualize what it
can be with a few acquisitions. "I think . . . they have the potential of being the next Intel on the fibre-optics side," Mr. Chotard said. Besides,
Cisco was probably seen as expensive three years ago, he added.
High multiple and stock price runup notwithstanding, most analysts still view JDS as a "buy." However, Susan Streeter, an analyst with Sprott
Securities Ltd., just moved her recommendation down a notch, going from "buy" to "buy on weakness." She says it was simply because of the
sharp rise in the stock price, adding that she still has "an extremely positive on the outlook going foward."
Bottom Line
Analysts generally love JDS Uniphase and the business it operates in, even after the huge runup in its stock price.
JDS UNIPHASE CANADA*: VITAL STATISTICS
Business: Designs, develops, manufactures and distributes a range of products for the fibre optic communications market.
SHARE VALUES
Trailing 12-month earnings per share...51½
Trailing 12-month PE ratio 314.22
52-week high $173.55
52-week low $118.00
Last close $160.25
Change from previous -$4.15
1-month average annual return 479.90%
TOP MUTUAL FUND HOLDINGS
% of total market value, as of June 30,* as of July 31
CDA Special Equity (KBSH) 19.2
AGF 20/20 RSP Aggressive Equity 8.8
Transamerica Agent Plan 7.6
Transamerica Growsafe Cdn. Equity 7.6
McDonald Canada Plus 6.5
AGF 20/20 RSP Aggress Smaller Co 6.0
Talvest Small-Cap Cdn Equity 5.9
NN Canadian Communications 5.9
Green Line Canadian Equity* 5.8
Synergy Canadian Growth Class* 5.8
-*Historical data reflects before and after Uniphase merger |
