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Gold/Mining/Energy : JDS Fitel -- Ignore unavailable to you. Want to Upgrade?

To: Chris Stovin who wrote (205)	2/18/1998 10:25:00 PM
From: Chris Stovin	Respond to of 815

MIDLAND WALWYN RESEARCH ------------------------------------------------------------------------ JDS FITEL INC. (JDS@$69.00 - 1-Buy) TOM ASTLE, CFA - (416) 369-7405 - tom.astle@midwal.ca ------------------------------------------------------------------------ Target : $110.00 5/97 5/98E 5/99E 52 Wk. High : $95.00 ----------------------------- 52 Wk. Low : $28.50 EPS $0.94 $1.80 $2.35 Shares O/S : 24.30 million P/E 73.4x 38.3x 29.4x Float : million CFS $ N/A $ N/A $ N/A P/CFS 0.1x 0.1x 0.1x Blue Top Date : Opinion Change Date : 11/25/97 EPS: 1997 1998 1999 ---------------------------- Q1: 0.14a 0.42a 0.53e Q2: 0.22a 0.47a 0.59e Q3: 0.23a 0.45e 0.59e Q4: 0.35a 0.47e 0.63e Company Description: Founded in 1981, JDS Fitel is a Canadian high technology company that manufactures and distributes a broad range of fiberoptic components, instruments and installation (resale) products for the growing fiberoptic communications market. JDS Fitel markets its products worldwide, with exports accounting for approximately 95% of sales in fiscal 1996. ------------------------------------------------------------------------ Headline: Q2 shows moderating growth, but still exceeds expectations - Target Raised from $100 to $110, 1-Buy ------------------------------------------------------------------------ All figures in C$ unless otherwise stated. Comments from 1/23/98 ... ($84.00) All figures are in C$ unless stated otherwise. CONCLUSION: JDS Fitel's Q2 again exceeded most published expectations but maybe not by as much as expected. Nonetheless, we have again raised our estimates, this time from $1.60 to $1.80 for fiscal '98 and from $2.18 to $2.35 for the year after. The market dynamics of the optical-networking market that have led JDS Fitel to post another 100% growth quarter are still intact, and we continue to expect long-term growth in the range of 50% plus. Since visibility is weak, the company's guidance remains quite conservative; accordingly, we view our estimates as being on the conservative side, as well. However, even using these conservative estimates, we can make the case for a $110 target based on paying 40x our calendar 1999 estimate (see below), which is still below our estimate of the company's long-term growth rate. While the valuation does introduce some risks, we view JDS Fitel as a well positioned play in the growth of optical networking, a key technology for bandwidth expansion. The stock remains 1-Buy. DETAILS: Margins - The gross margin has declined from an average of 53.3% last year to 51.7% as a result of some pricing pressure. This was not unexpected. We see this pressure continuing, but the company will be countering it with higher-margin products and sub-assemblies, as well as increased automation in production. Despite the pressure on the gross margin line, the net margin actually increased to 21.4% as a result of lower SG&A expenses relative to sales. Expansion - The company announced a significant expansion in the quarter. We expect the company will have doubled its square footage by the end of the year, which obviously reflects a strong growth outlook by the company. New products - The company indicated its plans to release more new products at an upcoming trade show. We plan to be at this show and believe the company's new products will enable the company to maintain its growth. VALUATION/SHARE PRICE IMPACT: Current Price $85.00 Forecast Return Target $110.00 29% EPS Growth 55% Calendar EPS Current P/E Target P/E P/E/G 1996A $0.75 113.8 147.3 2.7 1997A $1.47 57.8 74.8 1.4 1998E $2.04 41.6 53.8 1 1999E $2.78 30.6 39.5 0.7 Comments from 10/10/97 ... ($84.00) CONCLUSION The Q1 results clearly demonstrate that JDS Fitel is a key player in the growth of the optical layer in telephone networks. The revenue and earnings greatly exceeded our expectations. The company itself has raised its guidance on growth by 5% to the 35%-45% range, and we would be comfortable with 50% or more growth forecasts. We have raised our estimates from $1.27 to $1.82 for May 98 and $1.76 to $2.53 for 99. Furthermore, we have raised our target from $60.00 to $100.00 based on 40 times our next year's number and now rate the stock 1-BUY. DETAILS JDS Fitel continues to benefit from the increasing pressure telephone companies feel on their fibre-optic backbones. More and more carriers are hitting capacity on one wavelength systems and deciding to use Wave Division Multiplexing (WDM) systems to increase capacity. These carriers typically turn to WDM System vendors such as Ciena, Nortel, Lucent, and Pirelli to supply these systems. These vendors in turn buy many optical components from JDS to build these systems. WDM is clearly a technology that has come of age. This is the first stage of the growth of optical networking. Second wave to start in 1998 - Its all about wavelength management - As demand for bandwidth grows, so grows the size of the optical layer of our network systems. As this optical layer grows we need to develop ways to manage optical signals (wavelengths) as we now manage electronic signals. This creates the need for products known as optical add/drop multiplexers, which can peel a single wavelength out of a fibre cable without affecting other wavelengths. Other products will also include more complicated optical switches and monitoring devices. Capacity - Over the last quarter JDS has expanded floor space from 140 to 190 thousand square feet. However, since the company is still running 3 shifts, we expect this expansion to continue. CapEx spending has increased proportionally from $2.2 million last quarter to $4.6 million this quarter. VALUATION What to pay for 200% EPS growth? Actually we think sustainable (2 year) EPS growth could be in excess of 50% and thus given what the market is prepared to pay for growth (ie P/E/G ratios over 1.0) we think a 40 times next years number is reasonable and this gives us our $100 target. Current Price $83.00 Forecast Return Target $100.00 20% EPS Growth 69% Calendar EPS Current P/E Target P/E P/E/G 1996A $0.75 111.2 133.9 2 1997E $1.43 57.9 69.8 1 1998E $2.12 39.1 47.1 0.7 ------------------------------------------------------------------------ -END- The information contained in this report is obtained from sources believed to be reliable but we cannot represent that it is accurate or complete. Opinions based on technical factors may differ from the opinions of our fundamental analysts. Midland Walwyn Capital Inc., its directors and/or employees may from time to time have a position in the securities mentioned. Reproduction of this document in whole or in part is strictly prohibited. Copyright of Midland Walwyn Capital Inc. Head Office: BCE Place, 181 Bay St., Toronto, Ontario M5J 2V8. This report has been issued by Midland Walwyn Capital Inc. and distributed in the U.S. by Midland Walwyn Capital Corporation, a subsidiary of Midland Walwyn Capital Inc. Midland Walwyn Capital Inc. is regulated for investment business in the United Kingdom by The Securities and Futures Authority Limited.