WSJ Article...good pick for long term value investors with a few year horizon....JDSU:
TALES OF THE TAPE:Sector Suffers,JDS Uniphase Gets Bigger
By JOHNATHAN BURNS
Of DOW JONES NEWSWIRES
(This report was first published Friday afternoon.)
NEW YORK -- When Agere Systems Inc. (AGRA) announced earlier this week it would exit the optoelectronics business via a sale or unit shutdown, investors sent the stock higher - an acknowledgment that the optical component business is in shambles.
But Agere's stock movement was dwarfed by a surge at peer JDS Uniphase Corp. (JDSU). On Wednesday, the day of the announcement, Agere rose 8% but JDS Uniphase gained 17%.
Why the jump for JDS Uniphase shares, especially considering Agere Chief Executive John Dickson's comments following the company's decision?
"We believe the optoelectronics business has changed fundamentally and for the long term," he said. "With the excess capacity in the core (of the) network, we do not believe there will be significant levels of buying for some years to come."
Simply put, the worse the market for optical components gets, the more dominant JDS Uniphase becomes.
And Agere held as much as 12% market share in the once red-hot optical components market, Dickson said in a Wednesday conference call.
What is happening - and has been with increasing frequency since the slowdown in telecom equipment spending began two years ago - is a kind of "component Darwinism," says CIBC World Markets analyst Jim Jungjohann.
"The Telecom Bubble is no different than all the other boom and bust cycles, including Dutch Tulipmania, the English South Sea bubble, the Mississippi Company bubble in France, the great crash of 1929, Japanese real estate in the late 1980s and the more recent Internet crash," said Jungjohann. "It's a textbook case of what happens when an unsustainable glut of new, easily funded entrants are attracted to a market at a rate that overshoots the industry's long-term carrying capacity."
And, despite its acquisition streak (it has written down more than $50 billion in goodwill related to mergers), JDS Uniphase is expected to have enough cash to last well into a sector recovery, as elusive as that now seems to be. The company had $1.45 billion in cash equivalents and short-term investments at the end of the June quarter and no long-term debt.
"JDS Uniphase looks like 'the' survivor, with its strong balance sheet and product breadth," said Jungjohann, who does not own any JDS Uniphase stock. CIBC has provided investment banking services for JDS Uniphase, Nortel Networks Corp. (NT) and Agere.
Indeed, the carnage in the sector will continue to mount.
Agere joins an already lengthy list of companies, including Nortel, Corning Inc. (GLW), New Focus Inc. (NUFO), ADC Telecommunications (ADCT) and Finisar Corp. (FNSR), who have shuttered or announced plans to close or sell part or all of their optical components business.
Mark Langley, analyst with Needham & Co., said there are about 1,100 private optical component suppliers, mostly in the U.S.
"There are a lot of companies that will not survive until a market recovery," he said.
Langley said he expects only 5% to 10% of those companies to survive if the depressed levels of equipment buying continues until late 2004.
Needham currently makes a market in shares of JDS Uniphase and Finisar. In the case of Agere and Corning, he and his associate have received compensation upon various factors, including quality of research, investor client feedback and Needham's overall revenue, which may include investment banking revenues. "(Agere's decision to exit optoelectronics) is a good move for Agere," said Langley. "I think it's a positive indication for JDS Uniphase, but a dark day for the industry, and the reason I say that is Agere really was the poster child for automation in optoelectronics."
"In a more robust business environment, this was Agere's crown jewel," he added. "They had $1.2 billion in optoelectronics revenue in 2001, and $431 million in operating income, according to our estimates."
By comparison, Agere said optoelectronics accounted for only about $56 million of sales in the most recent quarter.
So one would assume JDS Uniphase would be a safe haven for investors playing the component market, right?
It depends on how long investors are willing to wait.
Langley still sees the threat of further bankruptcies in the carrier space and a constrained capital market, which is causing carriers to conserve cash by reducing equipment purchases.
"In January 2001, we (developed) a bankruptcy predictor," Langley said, adding that the model was based on the Altman Z-Score developed in 1968 by Edward Altman. "Only nine of the 38 leading wireline service providers were considered to be in a safe zone. In November, only nine of the 38 were. Now, we are down to 20 companies. Only one service provider is clearly not a candidate for bankruptcy. Two were in the gray zone. The rest were candidates for bankruptcy."
In other words, the industry has deteriorated, not improved, in 2002. And even though there are some signs of bandwidth pricing stabilization, the state of the carriers and credit markets indicates spending on equipment may not see growth for some time.
Langley estimates by the end of JDS Uniphase's fiscal year 2003 next June, the company will have roughly $1.1 billion in cash equivalents and short-term investments and about the same at the end of calendar 2003.
And that cash will likely came in handy, since getting bigger is not being accompanied by better sales as the steepest downtown in telecom equipment spending continues.
-Johnathan Burns, Dow Jones Newswires, 201-938-2020;
johnathan.burns@dowjones.com
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Updated August 19, 2002 8:00 a.m. EDT |
