Analysts Fret Over JDSU Growth

Three days before JDS Uniphase Inc. (Nasdaq: JDSU) reports its second-quarter results, the outlook for the company is good. But Wall Street analysts are cautious about future quarters.

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

Scott Raynovich 12/4/2012 | 8:59:46 PM
re: Analysts Fret Over JDSU Growth Are the analysts being myopic? What are the long-term issues for JDSU.
sshilling 12/4/2012 | 8:59:45 PM
re: Analysts Fret Over JDSU Growth I think we owe a great debt of gratitude to the big brains at Wit Soundview and the like (for knocking the stock price down over the last 5 months). In particular, if I remember correctly, two analysts downgraded jdsu around the $40 mark. They only missed the bottom by 2 or 3 dollars; very impressive.

The really fun part will be later this year when these same guys are pounding the table on jdsu after its price is above $100 per share. But I guess that's why they make the big bucks.
guru 12/4/2012 | 8:59:43 PM
re: Analysts Fret Over JDSU Growth JDSU will make the analysts look like fools. They looked so bad last year on their "analysis" that they are trying to make up for it by being very conservative and they are wrong. Again.
SPARKLE 12/4/2012 | 8:59:42 PM
re: Analysts Fret Over JDSU Growth Guru is right. JDSU is perfectly positioned right now and has essentially flawless design methodology, customers who don't have to fund their R&D efforts for them and a fantastic set of very sharp, very dedicated engineers.

This is JDSU's defining moment, we are lucky to watch an industry leader such as this at work.
Neiladri 12/4/2012 | 8:59:39 PM
re: Analysts Fret Over JDSU Growth There is a long-term issue for JDSU: Growth may never again reach the clip it did in late '99. Those earnings look like they were created by a bountiful capital expenditures situation unlike any we'll see again. If you bought JDSU thinking it could keep doubling earnings each year as it did then (and as the P/E ratio required it to) you may be in trouble.

I still think JDSU will grow at a 50%+ clip, and that's why I'm long the stock. Even if the analysts are being myopic, though, we've got to make sure we're not looking backwards and seeing the 150% growth that won't exist in the future.

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