Analysts Fret Over JDSU Growth
Today, the markets took such caution into consideration. JDSU shares lost 1.06 (1.75%) to close at 59.75.
Last Friday, Timothy Anderson, an analyst with Salomon Smith Barney, published a research report warning investors that a rise in Nortel Networks Corp. (NYSE/Toronto: NT) inventory levels coupled with an acceleration in its use of internally manufactured optical components could spell trouble for JDSU in the March quarter.
Nortel had $35 million to $50 million of optical component inventory that exceeded the company’s needs for the fourth quarter, according to Anderson.
“We believe a good chunk of the inventory draw-down is components, especially when combined with Nortel’s increased in house manufactured photonics. We think this may place some pressure on JDSU’s March quarter revenues,” he writes.
According to Anderson, Nortel held inventory on average just over 80 days for the December quarter. This is in contrast to 72 days reported for the same period a year earlier. But other analysts are not alarmed by these inventory levels.
“That event in isolation is really not enough to be concerned about,” says Arun Veerappan, managing director of Robertson Stephens. “Nortel’s inventory levels were actually down from 90 days last quarter to 82 days this quarter. And even if Nortel is making more in-house components, I don’t think you can conclude based on the results that they didn’t buy at the same rate from the outside.”
Although Veerappan thinks that JDSU will hit its expected revenue estimates of $920 million this quarter, he says that the March quarter could be challenging for it and other component suppliers.
“Going forward, I don’t expect them to raise their numbers,” he says. “We are in a tough market right now, and JDSU is affected by this just as much as anyone else. It’s a universal phenomenon.”
Veerapan’s cautious approach to future quarters seems to be an echo of what others have been saying over the past few weeks. Joseph Wolf, an analyst with UBS Warburg published a note that estimates JDSU and the entire sector will have a strong December quarter; but he says that future projections will rely heavily on other factors.
“Despite the recent volatility of the components sector, we expect the entire group to post earnings in line or ahead of our estimates for December quarter. Looking into 2001, we expect continued solid performance from the group.However, we expect that investors will need to hear some positive data points from both the OEM customers and service provider end users in the upcoming reporting season before the stocks will be able to sustain an extended rally,” he writes.
Wit Soundview (Nasdaq: WITC) also indicated concern for the future, downgrading JDSU from a Strong Buy to a Buy.
JDSU will announce its results on Thursday; its acquisition target, SDL Inc. (Nasdaq: SDLI), will announce results on Wednesday. The stock was trading down today about 2 percent at $59.75.
-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com