JDSU: Strong Presentation at SSB Tech. Conf.; Raising Price Target
Salomon Smith Barney
Wednesday, September 08, 1999
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--SUMMARY:--JDS Uniphase--Connectors & Other Components *Fred Leonberger, CTO of JDSU Uniphase, gave a confident presentation that emphasized how strong the markets are and how well-positioned JDSU is in those markets. *The company reiterated its current guidance. We think there's a little upside. *He emphasized that JDSU is pursuing virtually every optical component technology needed for tomorrow's optical networks. *Raising price target to $130. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 06/00 EPS $0.25A $0.25A $0.27A $0.32A $1.09A Previous 06/01 EPS $0.37E $0.37E $0.38E $0.44E $1.56E Current 06/01 EPS $0.37E $0.37E $0.38E $0.44E $1.56E 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 Previous 06/03 EPS $N/A $N/A $N/A $N/A $N/A Current 06/03 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1H Prior:No Change Price (9/7/99)......:$113.31 P/E Ratio 06/01.....:72.6x Target Price..:$130.00 Prior:108.00 P/E Ratio 06/02.....:N/Ax Proj.5yr EPS Grth...:50.0% Return on Eqty 00...:17.2% Book Value/Shr(00)..:3.85 LT Debt-to-Capital(a)0% Dividend............:$N/A Revenue (01)........:1431.50mil Yield...............:N/A% Shares Outstanding..:87.0mil Convertible.........:No Mkt. Capitalization.:9858.0mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ REMINDER: For all of you interested in fiber-optics, Corning will present at our conference today at 10:20 at the Sheraton Hotel in New York. Special bonus appearances by Alan Husted, head of fiber, and Jerry Fine, head of photonics, who are accompanying Roger Ackerman, CEO, and Kathy Dietz, Director of IR. JDS CTO, FRED LEONBERGER, GIVES PRESENTATION THAT EXUDES CONFIDENCE IN GROWTH OF MARKETS, JDSU'S POSITION--REITERATES GUIDANCE We were pleased to have Fred Leonberger, CTO of JDS Uniphase, present yesterday at the Salomon Smith Barney Technology Conference. As well as stepping through the basic presentation, which outlines the history and growth potential of the WDM market and the way it's driving JDSU's business, Fred emphasized the following: REITERATED GUIDANCE--SHOULD BE UPSIDE He sees growing demand from customers, with product transitions at any one customer having virtually no impact on JDSU because of the diversity of the customer base, the strong total demand for these systems, and the steady march toward higher and higher channel counts. He re-iterated guidance of $218-$220 million on the top line for the first (September) quarter, $0.24-$0.26 on the bottom line, and $1.08-$1.11 for the full year, 60%-65% growth. Given the lack of supply constraints he cited, yet the full-out state of the manufacturing operations, we suspect that we are poised for at least modest upside to these numbers. Fred emphasized the high barriers to entry in the components business and the growing role of merchant providers. He spoke of the increased opportunities at customers as a result of the merger, specifically highlighting the source laser business, which is now heavily captive. Fred alluded to the changed attitude toward JDSU's source laser products now that the division was sold to them from Philips. MY R&D BUDGET IS BIGGER THAN YOURS One of those barriers to entry is a large R&D budget that allows the company the luxury of not placing bets on any one technology too early, but, rather, offers it the opportunity to pursue every technology that holds promise. SWITCHING, CROSS-CONNECTS & ADD-DROP--JDSU IN THE MIDDLE OF IT ALL 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. These start ups are focusing on optical add/drop, cross connects, and switches. The large telecoms also want these devices. JDSU is currently the only company we know of that can offer all the parts and pieces necessary for an add/drop. Eventually, all functionality will be resident on one device, including tunable lasers, detectors, modulators, demuxes, and switches. JDSU currently has virtually all the technologies now being contemplated for future smaller and higher-count optical add/drop, cross connects, and switches and is developing various components for the switching fabric. It is in the enviable position of not having to place any premature bets on any one technology. As such, they are pursuing virtually every potential technology: *mechanical - expertise from JDS's restoration switch business, where it has a leading position *polymer waveguides - via Akzo Nobel acquisition *silica on silicon waveguides - via IOT acquisition *MEMS (micro electro-mechanical systems) - looking at it, may be working with start-ups JDSU has a strong position in the mechanical solution, is, in fact, the leading provider of restoration switches. These can be scaled up for provide 8x8 switches. We would expect that its Akzo acquisition gives it one of the leading research efforts in polymers, and the IOT acquisition--along with its own semiconductor and lithium niobate modulator experience--offers it a leg up in etching small waveguide structures onto silicon. Useful waveguides are likely 2-4 years away, but getting a jump on this technology is crucial, in our eyes, for integrated optics for the new core network products coming down the pike. In the meantime, JDSU has the technology for today's add/drop modules. JDSU is looking at start ups as acquisition targets ($950 million in cash on the balance sheet), and the company is contemplating an investment arm to gain access to technology being developed at startups. RECAPPING WHAT WE LEARNED IN JULY AT THE OTTAWA FACTORY OPENING 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. VALUATION Our $1.09 estimate for FY2000 forecasts 66% revenue growth and 49% EPS growth on margins that decline throughout the year. Given that margins for the quarter were up significantly for both companies, we view the scenario of declining margins as improbable, but the impact of additions to capacity, mix shift, and other factors are harder to predict, in our view, than the strong growth. We are warming to the notion that this company should trade at a multiple beyond its long-term 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 32%, which look sustainable in the near and intermediate term based on the growth of the market and the high barriers to entry. JDS Uniphase should have a strong position in anything optical, a technology crucial for today's and tomorrow's telecommunications. The combined company not only has the resources of both Uniphase and JDS Fitel at its disposal, but a high-growth revenue base over which to leverage a continued high level of investment and a high-multiple currency with which to make acquisitions. The current 65 target multiple on our calendar 2001 estimate of $2.00 is slightly below the company's current revenue growth rate and considerably above a long-term growth rate of 40%-50%. That's a little rich, but given the strong visibility on the market and JDS Uniphase's solid position in it, we believe that the shares will go higher still, retaining this type of multiple on st rong growth. Assuming 50% growth in calendar 2001, we think that in 12 months the stock can go to $130. |
