cnbc.com
Buy JDSU While It's Down
By Eric C. Fleming
CNBC.com Stocks Reporter
Mar 13, 2001 03:00 PM
JDS Uniphase 52-week stock performance
JDS Uniphase Corp. {JDSU, News, Boards}, for the third time in six weeks, has trimmed its financial targets in the wake of steep downturn in telecom carrier spending. Sounds awful, but this could be a great time to get in.
The San Jose company makes laser subsystems and other equipment that light up fiber-optic communications. In February, it completed its $17 billion acquisition of laser maker SDL Inc. {SDLI, News, Boards}, strengthening its position in the optics sector.
Unfortunately current events haven't been kind to JDS Uniphase. Telecommunications companies, some with growth plans far in excess of reality, have cut back spending, stifling the stratospheric growth of the companies selling the equipment for these buildouts. To that end, JDS Uniphase has had to set off three warning flares that growth won't be as robust as previously thought.
JDS Uniphase now expects fourth-quarter revenue at $925 million, generating earnings of 14 cents a share - 3 cents lower than the revised Thomson Financial/First Call consensus estimate. On Feb. 13, the company forecasted earnings of 17 cents a share on $1 billion in sales for the quarter. Earlier this month, JDS Uniphase let go of 3,000 workers, or about 10 percent of its workforce.
Eroding margins are one concern of Wall Street. Pricing pressure is seen bringing gross margins down to 48 percent for the quarter vs. 51.4 percent in the same period the previous year, anticipates Arnab Chanda, analyst at Lehman Brothers, who rates JDS Uniphase "market perform."
To that end, JDS Uniphase chief financial officer Tony Muller said Tuesday at an industry conference that the company is working on cutting production costs by automating its production. JDS intends in the end to fully automate its production process, which will cut costs.
An obvious concern is visibility, Street talk for how far a company can comfortably guess results. JDS Uniphase, like many others, can't see well enough to offer a forecast for its fiscal 2001, which begins July 1.
So, where's the stock go in the near-term? Nowhere, says Natarajan Subrahmanyan, analyst at Goldman Sachs, who sees the downside from JDS Uniphase's string of warnings baked into its stock price.
There are at least three reasons why this is good news.
First of all, the hottest growth prospects remain in technology, and in communications, it's the optical sector that's the most attractive. The reason is simple: it makes no sense that demand for a fast, fat communications pipe will let up. Michael Ching, analyst at Merrill Lynch, sees traffic growing about 175 percent a year for the next three years and data and voice traffic grow.
To be sure, the providers got a bit ahead of themselves with the capacity they needed, and now the equipment makers have dust gathering on inventory and the demand-supply gap snaps back. Yet, the overriding trend is that demand is still growing, and will outlast this glut.
"The longer-term view is that the optical network is a longer-term investment opportunity and that this is a bump, albeit a severe one, in that road," says Joseph Wolf, analyst at UBS Warburg, who rates JDSU a "buy." Wolf took his 12-month share price target down to $48 from $60 on March 7.
Secondly, JDS Uniphase is the 800-pound gorilla in fiber-optic components. With that bulk, competition doesn't have the muscle to go toe-to-toe with JDS Uniphase. With SDL, JDS Uniphase is the undisputed laser king.
With the purchase of SDL Inc., JDS Uniphase is a giant in lasers that create all the light that flies through the glass threads. JDS also makes components that modify and switch signals, and modules that amplify and transmit signals, as well as testing gear and optical display and projection equipment.
And finally, analysts are flying blind for the near-term, now that companies can't spoon feed projections to Wall Street when they have zero visibility. To be sure, it's not great news when companies can't see in the near-term.
With the end of the slowdown uncertain,"it's hard to recommend that investors have to own JDSU or its peers right now," says Charles Wilhoit, analyst at J.P. Morgan Securities.
However, when the overly bullish sell side analysts don't have any foundation to tout a stock, it can be a buying opportunity for those with a long-term perspective. Analysts, without their precious "guidance," don't stick their necks out only offer the most timid of opinions.
"We have been working on developing some worst case scenarios for photonics companies to determine a floor valuation," said Tom Astle, analyst at Merrill Lynch, who rates JDSU a "long-term buy," in a March 6 note.
Looking beyond 2002, Astle sees a slightly better future for photonics, as a buildout in metropolitan fiber networks begins. The trouble that Astle sees is that the capital markets may still be in the dumps, and therefore wouldn't offer an easy place to find funding for capital spending. Also, the components at present don't suit the needs of the metro market.
CNBC.com: Metro Networks Builders Sitting Pretty
Telecom needs of a city mirror the streets themselves: there's greater need for traffic control, rather than speed. Metro markets that need switching of traffic, rather than mass capacity over great distances, like the long-haul market. For example, you don't need amplifiers for a signal that has to travel across town, but you do need transceivers, that can both transmit and receive traffic.
However, JDS Uniphase isn't strictly focused on long-haul, says John Lively, analyst at RHK Inc., a market research firm.
JDS Uniphase has assets that fit in the metro market. For example, JDS Uniphase makes transceivers, has switches from its E-Tek purchase and its amplifiers are need to some extent as data bounces through metro network.
So, JDS Uniphase, with its breadth in both long-haul and a toe or two in the metro market, has the strength to thrive when business picks up again, say analysts.
"Long-term demand for next generation optical networking components will be strong," says Subrahmanyan. |
