Salomon Smith Barney report re: Impact of LU Pre-release on GLW, JDSU, ETEK, SDLI
JDS Uniphase Corp(JDSU)*
Rating: 1H
19990714
Salomon Smith Barney ~ January 7, 2000
--SUMMARY:----Connectors & Other Components
*BOTTOM LINE: Lucent emphasized strong demand for optical equipment.
Shift to 80-channel and OC-192 positives for GLW, JDSU, ETEK, SDLI. All
four companies see no impact from Lucent. Body language is extremely
bullish.
*The Lucent announcement may worry the stocks for a while, but we would
step up to the plate, because it's not easy to get an opportunity like
this, and they should all deliver upside surprises this quarter.
*The last two times there were customer issues, UNPH (pre-merger) sold off,
there was no impact, and they turned out to be great buying opportunities.
*Demand is great for optical and the market is moving exactly in the
direction it should go.
--OPINION:------------------------------------------------------------------
BOTTOM LINE: LUCENT EMPHASIZED STRONG DEMAND FOR OPTICAL EQUIPMENT--THE
SHIFT TO 80-CHANNEL AND OC-192 POSITIVES FOR GLW, JDSU, ETEK, SDLI
The last two times there were customer issues, UNPH sold off, there was
no impact, and they turned out to be great buying opportunities. We
remember nearly two years ago when Ciena stumbled and there was a hiccup
in the WDM systems market. UNPH traded off, went on to post a positive
surprise, and it was a great buying opportunity. Then several quarters
later, there were pre-releases and problems at all five of Uniphase's top
customers. The stock weakened, the quarter and outlook were fine, and it
was another great buying opportunity. We think it's the same here. And
besides, Lucent's WDM business doubled in the quarter.
We would buy all of these stocks on weakness, recognizing that there
could be some deceleration in amplifier growth in 1Q if there are
stranded amps out there. But this is our theory, the companies are
adamantly contesting it, and they are seeing no inventory issues, and we
believe that none of them is involved in any reported components
shortages. Even with a deceleration in Lucent's amp business in Q1,
which is not likely but is a possibility, it should not result in any
downward estimate revisions, anyway, in our view. This may worry the
stocks for a while, but we would step up to the plate, because it's not
easy to get an opportunity like this, and they should all deliver upside
surprises this quarter. BOTTOM LINE: demand is great for optical and
the market is moving exactly in the direction it should go.
And whereas the valuations on these stocks were once laughable with a
full-belly laugh, after the recent weakness, although still high, the
valuations are probably only worth a chuckle. We see money going right
back into these names once investors realize how strong the demand is in
the industry, a point Lucent stressed numerous times last night on the
conference call.
Closing Close % Chg Current Peak
High 01/06/00 Closing P/E (2000) P/E (2000)
GLW 129 105.00 -22.9% 44.7x 54.9x
JDSU 188 149.75 -25.5% 196.8x 247.1x
SDLI 230 172.25 -33.5% 138.0x 184.2x
ETEK 134 99.06 -35.4% 126.3x 170.9x
And the multiples could go lower today.
WE NEED TO FOCUS ON FUNDAMENTALS--OPTICAL DEMAND AND THE SHIFT TO MORE
CHANNELS AND HIGHER SPEEDS ARE ALL POSITIVES FOR COMPONENTS
* OC-192 runs best on LEAF
* SDL ramping OC-192 modulators in capacity constrained environment
* Body language from all our companies is great, no signs of a
deceleration in the business at all
* Higher speed and more channels translate into more lasers, more
filters, new amps, etc.
* We are hearing Lucent may re-design its demux, which could be good news
for the filter manufacturers. We are hearing that their AWG doesn't work
well (but probably not the reason for the problems)
EXPOSURE TO LUCENT (last quarter):
JDSU - 23% (probably heavily weighted toward amp modules, the rest mostly
submarine chips)
SDLI - 15%-25% (mostly 980nm modules through GLW and JDSU for amps)
ETEK - less than 5%. IF THIS SELLS OFF TOMORROW, WE BELIEVE YOU SHOULD
BUY IT! SOUNDS LIKE THEY ARE HAVING A GOOD QUARTER AND THEY COULD GET
SOME FILTER BUSINESS OUT OF THIS.
GLW - probably less than 5%, as the amp business is mostly Nortel
If Nortel ends up a winner at the end of all of this, we believe the
biggest beneficiary would be GLW. ETEK, also, because of filters.
COMPANY SPECIFIC COMMENTS
CORNING:
* Most of Corning's amp business is Nortel
* Very low exposure to Lucent
* Acceleration in Lucent business might be upside this quarter, but a
little worrisome as more amps were probably sold to Lucent Wavestar, and
it stands to reason that there could be a hiccup while the boxes catch-up
* Corning is not worried, and we believe that the worst case scenario is
the 1Q acceleration in photonics revenues might not be there, which we
view as okay given the longer-term positives of the shift to running
OC-192 on 80-channel systems
* OC-192 runs best on LEAF
* If NT gains, we believe it could ultimately better for GLW
* GLW likely to be on a roadshow soon in support of their deal, saying
positive things
JDS UNIPHASE:
* We estimate amps to Lucent are about $40-$50 million a quarter
* Even if a slight deceleration, not much impact on bottom line, mostly
psychological
* In fact, shift to OC-192 should be good as JDSU is reportedly ramping
production of its OC-192 modulators well, with many customers, and should
be shipping in volume by June
* Management does not believe there are any amps in anyone's inventory
anywhere
* Wavestar still going great for JDSU
SDL:
* Product is so powerful, that no matter who wins, good for SDLI
* SDL ramping OC-192 modulators in capacity constrained environment
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