JDS Uniphase's Next Split
By David Wilson
(Commentary)
Princeton, New Jersey, Feb. 25 (Bloomberg) -- JDS Uniphase Inc. has a problem that many companies can only wish for: it can't split its stock fast enough.
The world's largest maker of components for fiber-optic communications networks is two weeks away from completing its third 2-for-1 split since July, when Uniphase Corp. merged with Canada's JDS Fitel Inc. to form the company.
Since JDS Uniphase declared the split on Jan. 3, the stock rallied 60 percent in Nasdaq Stock Market trading. Based on its closing price yesterday of 258, the price of one share after the split will be higher than it was when the company announced the last one in September.
The stock's soaring price reflects optimism among investors and analysts about the outlook for fiber-optic networks, which use glass cables instead of copper wires and can handle more telephone calls, data, audio and video. The company also stands to benefit as telecommunications and cable-television companies seek to increase the speed of their networks.
``JDS Uniphase has, in our view, an excellent position' within the fiber-optic component business, ``one of the highest- growth communications markets,' David Wong, a PaineWebber Inc. analyst, wrote yesterday in his first report for the firm.
Active and Passive
Wong, who moved to PaineWebber earlier this month from Needham & Co., named the San Jose, California-based company as his top pick and gave it a ``buy' rating. He declined to elaborate on the report.
Lehman Brothers Inc., which doesn't have a rating on JDS Uniphase, nonetheless took a more favorable view of its outlook the previous day. The firm added the stock to its U.S. strategy portfolio, designed to guide institutional investors in their decision-making.
The company produces semiconductor lasers for equipment used to transform phone calls and other information into light beams for sending over fiber-optic lines. It also makes devices that switch the light on and off during transmission.
Products such as these come under the heading of ``active' components. The company also produces ``passive' components, used to guide, mix, filter and connect light as it travels through a network. Phone-equipment makers such as Lucent Technologies Inc. and Nortel Networks Corp. buy them.
Demand for those items is on the rise as phone and cable companies look for ways to handle more data, especially from the Internet and corporate networks.
Larger Numbers
Sales for the December quarter more than doubled from a year earlier, to $281.7 million. The company had a loss in the quarter because of costs related to two acquisitions, completed after Uniphase and JDS Fitel got together.
Analysts expect earnings before one-time items of 72 cents a share for the year ending in June, and $1.10 for the following year, according to First Call/Thomson Financial. In fiscal 1999, the company would have earned 34 cents a share if the merger had already taken place.
JDS Uniphase bought Epitaxx Inc., a maker of products that detect and receive light sent over networks, for $400 million of stock in November. It acquired Sifam Ltd., a U.K.-based maker of products that split, combine and filter light, the following month for 60 million pounds ($97.3 million).
Since then, the numbers have become larger. Three weeks ago, it bought Optical Coating Laboratory Inc. for stock valued at $5.7 billion -- twice the amount when the companies agreed on terms last November. The filter producer got 95 percent of its sales from the company before the takeover.
The company now wants to take over E-Tek Dynamics Inc., which last month accepted JDS Uniphase's offer of stock valued at $15.5 billion. Buying E-Tek will allow the company to increase its production capacity and make new products faster.
`Buy' Restored
JDS Uniphase said in October that it wanted to double or triple manufacturing capacity by the end of 2000. In December, the company disclosed plans to spend $125 million to expand at several locations worldwide.
In building its business, the company has the advantage of a rising stock price. Ihe shares have soared almost 12-fold since the January 1999 announcement of the Uniphase-JDS Fitel merger. They have rallied 25 percent this week alone, increasing the company's market value to $92 billion.
After adjusting for the pending 2-for-1 split, the stock closed yesterday at 129. The per-share price was 116 9/16 last September before the company declared the second of its three post- merger splits. By the time the split was completed, the shares had almost tripled.
Amid that kind of performance, analysts have lined up to recommend the stock. Out of 36 brokerage firms, 32 have ``buy' ratings, according to Bloomberg Financial Markets. PaineWebber's Wong rejoined the ranks yesterday. While at Needham, he gave the stock a ``strong buy' rating, the firm's highest.
`Better Position'
Wong said in his report that he expects revenue to increase 70 percent or more annually ``for several years.' One reason is the potential for fiber-optic networks to become more widespread within cities, rather than just between cities or continents.
Another is the likelihood that communications companies will upgrade their networks, he wrote. The company's components are used mostly in high-speed networks, capable of transmitting information as much as 64 times faster than slower ones.
In addition, Wong pointed to the possibility that phone equipment makers such as Lucent, Nortel and Alcatel SA will decide to make fewer components themselves. ``In-house' producers account for as much as half the market, by his estimate.
Lehman's move, by comparison, reflected its strategists' interest in putting more emphasis on growth stocks -- shares of companies likely to have the fastest earnings and revenue growth rates -- within the U.S. strategy portfolio.
JDS Uniphase previously was part of the firm's ``virtual economy' portfolio, designed to highlight companies that will benefit most from the growth of the Internet. It took the place of Tellabs Inc., a maker of products used to manage traffic on phone networks, in the strategy portfolio.
The company is ``in a better position to profit' because networks that rely on fiber optics are becoming more widespread, said Arun Kumar, a senior strategist at Lehman.
If the expectations of analysts such as Wong and Kumar are on target, the next stock split may not be far away.
bloomberg.com
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