Finding Opportunities Along the JDS Uniphase Trail

In the wake of JDS Uniphase, everyone wants more and more fiber
companies. One to look at is Newport Corp.

Last week, JDS Uniphase (JDSU)
once again used its stock to build its fiber empire. The acquisition
totaled about $15 billion and the target was E-Tek Dynamics (ETEK). True,
this stuff seems outlandish. Then again, Cisco became a powerhouse by
using the same strategy.

JDS is becoming a leader in the fiber-optic equipment market – which is
expected to surge to $22 billion by 2003. Currently, the market is $4
billion. The reason for the growth is simple: Data networks are exploding
with traffic.

In fact, there is a scramble to add capacity so as to meet demand.
Interestingly enough, Lucent reported lower earnings because the company
was unable to fill their burgeoning orders.

In this fast-charging market, there are other players that should be major
beneficiaries – as well as buyout candidates. One that looks attractive is
Newport Corp (NEWP)

The company is a global supplier of precision components, instruments and
measurement products for the fiber optic industry. Since 1971, the company has been distributing the Newport Catalog, which is a leading sourcebook for such equipment (the catalog, of course, is now online). The company
has built its technology internally, as well as through several acquisitions – so as to offer a full suite of solutions.

The revenues of the company have not been growing quickly. But the main reason is that the company is transitioning its product line away from traditional product lines towards the fiber market.

For example, the company reported its financials yesterday. While the
company’s revenues rose 24 percent to $41.5 million, the company’s fiber
sales surged 91 percent to $11.8 million. Further, the company had a profit of $3
million, which was up from $2.6 million in the same period a year ago.

The stock has been red hot – with a 52-week range of $11-9/16 to $78-7/8. However, the price action still lags such companies as JDS Uniphase.

As JDS and other fiber companies (such as Lucent) expand capacity, there
will be huge demand for measurement and testing equipment. It does not make
sense for these companies to develop these technologies. Rather, it makes
more sense to either outsource it or buy it. In other words, it is a
win-win situation for Newport Corp.

Yes, there is definitely risk. But Newport Corp has deep experience,
strong customers and has an able management team. Having steered itself
from its reliance on the defense industry, the company is now entering the
ranks of the superfast infrastructure companies.

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