JDSU: Second Chance for Investors?

The team at JDS Uniphase
must have a secret copy of Cisco’s rulebook for success. Since 1999, JDS
purchased 11 companies. Like Cisco, the goal is to give customers what they
want: end-to-end solutions.

The price range is $48-1/4 to $153-3/8 during the past 52 weeks. When the
stock was selling at nose-bleed valuations, JD Uniphase wisely spent this
cheap currency to build an optics empire. The crowning achievement of the
deal-making was SDL . The
price tag? It was a whopping $41 billion. In fact, this was after JDS
Uniphase spent $15 billion for E-Tek Dynamics.

But after the buyout frenzy, JDS Uniphase has become the leader in optical
components. That is, customers can buy laser subsystems, testing equipment,
passive components and active components.

There are certainly big risks with mega acquisitions. Of course, the big
wild-card is integration. A bad acquisition can wreck a company, as has
been seen many times over the years.

Moreover, the accounting for the acquisitions can be highly complex. After
all, in the company’s previous earnings report, there were six different
income statements.

Keep in mind that the acquisitions mean lots of goodwill on the balance
sheet (over $20 billion). Essentially, goodwill is the difference between
the purchase price of an acquisition and the company’s book value. Of
course, tech firms typically have intangible assets (patents, software, etc)
instead of hard assets. However, this goodwill needs to be expensed over
time – which reduces a company’s reported earnings.

JDS Uniphase has been able to continue its vigorous growth. Then again, the
optical component business is explosive – and should continue the good-times
for at least the next five years. The company forecasts its five-year
annual earnings growth rate at 48%.

In the past quarter, JDS Uniphase reported revenues of $786.5 million, which
was a 22.7 percent sequential increase and a 170.8 percent increase from the
same period a year ago. The company earned 18 cents per share, which was 2
cents better than expected. In fact, the company has consistently beat Wall
Street estimates (yes, another trick learned from Cisco).

You can see the earnings estimates for JDS Uniphase at
For this year, the company is expected to earn 76 cents per share and $1.07
next year. However, there is wide discrepancy between the low and high
estimates. The low for this year is 60 cents and the high $1.01. As for
next year, the low is 90 cents and the high is $1.51.

With problems at Lucent and a disappointing quarter with Nortel, there were
obvious concerns with JDS Uniphase. But companies such as Nortel and Lucent
need optical components; simply put, they cannot afford to miss-out on the
optics race.

Perhaps this is why JDS Unisphase was so bullish on its earnings conference
call, as the company increased its guidance for 2001. According to the
company, there are no signs of an industry slowdown, making it reasonable to
assume that the company will be able to hit or exceed its estimates going

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