Optical components

Is JDSU's Cap Set Too High?

As JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) prepares for the announcement of its fiscal 2003 financial figures on Thursday (July 24), analysts give the company good reviews for its restructuring efforts. But the continued lack of profitability may soon become a sticking point for investors.

With JDSU shares now trading at a premium valuation relative to its peers, investors may soon start to question whether it deserves such a price while it's still losing money. Analyst don't see it returning to profitability until 2004 or even 2005.

In many ways, the ball's in JDSU's court. It's still the dominant player in the optical components space, with competitors such as Bookham Technology plc (Nasdaq: BKHM; London: BHM) and Avanex Corp. (Nasdaq: AVNX) vying for second place (see Bookham Buys Nortel's Components Biz and Avanex Deal Reshapes Sector).

As investors have sensed the prospect of a telecom recovery, they've bid up JDSU's shares, which have risen 28% since the beginning of the year. But analysts said that merely being the biggest player in the optical components market isn't worth the nearly $5 billion market capitalization JDS is maintaining.

Investors may be looking toward a 2004 recovery in optical components, and analysts say that's not likely to happen. "They're going to get back to stability slower than people are expecting," says Max Schuetz, analyst with Credit Suisse First Boston Corp..

JDSU isn't likely to hit profitability until calendar 2005, says Stephen Savas, the Goldman Sachs & Co. analyst who initiated coverage of JDS with an Underperform rating last week, citing overinflated share prices.

His logic goes like this: JDSU's price-to-sales and price-to-book-value ratios seem out of whack with the rest of the industry. Given Friday's closing stock price of $3.29, its market cap sits around $4.7 billion, putting its price-to-sales ratio at 6.4.

Savas's report points out that the median price-to-sales ratios for other optical component companies sits closer to 5.4. Median price-to-sales for less specialized component companies such as TriQuint Semiconductor Inc. (Nasdaq: TQNT) and Agilent Technologies Inc. (NYSE: A) sits even lower, at 2.3.

Meanwhile, as JDSU continues to shed employees, its revenues are likewise dipping. Revenues for fiscal 2003, ending June 30, are likely to clock in around $678 million, Savas writes. That compares with $1.1 billion in fiscal 2002 and $3.2 billion in fiscal 2001 (see JDSU Posts Loss, Plans Cuts and JDSU Closes Fiscal Year).

Among the difficulties JDSU faces is that, like everyone else, it's turning its focus to the metro and access markets, rather than the once-glamorous long-haul arena. And that means an adjustment to lower margins than the company had banked on.

"There'll be some signs of life in those [metro/access] businesses going into next year, but the problem is, those are lower-performance markets," Credit Suisse's Schuetz says. "They're going against guys like Agilent that are used to commodity markets."

What's been boosting JDSU's financials for the past year is its non-telecom business, which has accounted for half the company's revenues. Most of this business is based on the company's thin-film technology, and it includes quirky applications such as the color-changing ink used on new U.S. currency.

Schuetz suspects that the thin-film business might lose a bit of strength, however. JDSU's largest customer has become Texas Instruments Inc. (NYSE: TXN), which uses thin-film components in its Digital Light Processor (DLP) devices for video projectors. TI comprised 13 percent of revenues in the March quarter.

But Schuetz thinks TI is slowing production of those devices as the sales channel fills up. Moreover, he says TI has improved the yield on its DLPs, which means fewer defective parts and, consequently, slightly lower volumes needed from JDS Uniphase.

— Craig Matsumoto, Senior Editor, Light Reading

whyiswhy 12/4/2012 | 11:44:00 PM
re: Is JDSU's Cap Set Too High? The Company also announced that Anthony R. Muller, Executive Vice President and Chief Financial Officer, has advised the Company of his plans to retire by the end of the first calendar quarter of 2003 during which he will turn 60. The Company has commenced considering candidates to be his successor.

60 smixty. More like he did the good trooper-thing by telling investors earlier this year they would be profitable by the end of this FY.

Now that the lie is exposed, he has to retire.

This has been a semi-consistent motus operandi at JDSU: prop up the near-retirement exec to lie to the investment community, then when the balloon bursts, announce his/her retirement or departure.

Lichtverbindung 12/4/2012 | 11:43:58 PM
re: Is JDSU's Cap Set Too High? JDSU is in the middle of an indentity crisis. Jozef sill believes they should be a fiber optics company, that is indeed who they are today but that means keep losing money and layoffs after layoffs losing the soul and spirit of what used to be JDSU. Syrus would like JDSU to be a diversified company where fiber optics does not represent more than 25% of revenues and that can be made profitable by adjusting the telecom burn to the market reality.

Following Syrus is the logical thing to do if you are an investor and diversification can be obtained thru acquisitions and by using some of the cash reserves, in that case Jozef should leave or only stay to decorate the office.

If Jozef wants to work for a fiber optics company, he should send his resume to avanex and bookham
whyiswhy 12/4/2012 | 11:43:55 PM
re: Is JDSU's Cap Set Too High? You got to be kidding, or one of them stoooooopid investors I keep talking about....which is it?

Jozef has a short tenure in any event, that was known before Don left last December. It is also true that Syrus was brought in to transform JDSU to a more diversified posture. And saying you want to get 25% of your revenues from fiber is easy (zero-over-one-effect).

Jumping from that to saying Syrus is THE MAN and he is going to make money doing something else with their cash going forward is, well, stoooopid.

Crap, why not just hand your wallet over to him and save the effort of buying the stock?

slayer666 12/4/2012 | 11:43:55 PM
re: Is JDSU's Cap Set Too High? In case you haven't noticed...half their revenue is coming from paint. Or the additive that goes into the nice two-tone stuff so popular in the rice-burner community. Thank god for lowered Civics!

Hey, why doesn't Kevin use it on his INDY car??? Oh yeah, he took all his money out already...

And trading at 5.4 x Revenue? Where were these luminaries when it was trading at 30 x... Recommending it as a strong buy, and doubling the price target!
Lichtverbindung 12/4/2012 | 11:43:49 PM
re: Is JDSU's Cap Set Too High? whyiswhy,
I am probably stooopid as I still own JDSU stock ;-) I'd just like to see Jozef go, his time has passed and it would be a good sign to the financial community that JDSU is ready to change.
whyiswhy 12/4/2012 | 11:43:43 PM
re: Is JDSU's Cap Set Too High? News flash to savvy JDSU investors:

Neither Don nor Jozef has been running things at JDSU since Syrus (the Morgan Stanley hand picked CEO) came on board. Day uno.

Don just retired, and Jozef is maybe allowed to send out invites to board meetings, and probably ends up making the coffee (as in make mine French roast, and where is the fresh creme?).

Its long been recognized by the board and the institutional investors that JDSU must use its cash to diversify outside of telecom for sure, outside of fiber probably, and maybe even outside of photonics.

One thing for sure is MS thinks Syrus is THE MAN. That's directly from the horses mouth.

As a former JDSU investor who enjoyed some success under Don and Jozef, and then cashed out (like they did) maybe a bit later than I should have, I can say I want to see a better track record than Syrus has been able to generate to date for me to put ANY money in his hands.

So far, I am under-whelmed.
verstand 12/4/2012 | 11:43:36 PM
re: Is JDSU's Cap Set Too High? The Company also announced that Anthony R. Muller, Executive Vice President and Chief Financial Officer, has advised the Company of his plans to retire by the end of the first calendar quarter of 2003 during which he will turn 60. The Company has commenced considering candidates to be his successor.

What are you talking about? JDSU's CFO is Ron Foster from Novell in March, 2003.
whyiswhy 12/4/2012 | 11:43:34 PM
re: Is JDSU's Cap Set Too High? I should have said retired before the spit hit the fan: Foster gets to inject the "We just discovered it" story about breakeven being one year from now.
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