By Paul Larson (TMF Parlay)
March 30, 2000

JDS Uniphase Corp.

Ticker: (Nasdaq: JDSU)
Phone: 408-434-1800
Website: www.jdsunph.com
Price (3/27/2000): $119 3/8

How Did It Double?

The story of how JDS Uniphase doubled is actually quite easy to understand. Through numerous mergers and acquisitions, JDS Uniphase has created a sort of "dream team" of fiber optic equipment suppliers. The company is now far and away the leading supplier in its portion of the rapidly expanding fiber optics market, and Wall Street typically pays a premium for top dogs.

By largely using its stock as currency, JDS Uniphase has been able to complete its acquisitions without harming its balance sheet. Today the company has over $800 million in cash and equivalents with essentially no long-term debt. Of course, the number of shares outstanding has dramatically grown over the past year, but most of the deals have been neutral to accretive to the company's income statements. More importantly, JDS Uniphase is now twice as large as the rest of its competitors combined.

There is plan behind the numerous mergers. JDS Uniphase used to make only certain subsystems needed in fiber optic networks, but the company has been acquiring firms that offer complementary products to its own. Now, the company is in the process of packaging entire systems together as one cohesive unit, reducing the number of vendors that fiber network firms must deal with when purchasing systems that produce the light that is transmitted over fiber. So-called "one box" solutions make a lot of sense from a buyer's standpoint, which is certainly one of the reasons JDS Uniphase has seen demand for its products skyrocket.

As one might guess, those who have bought stock in JDS Uniphase over the past year are sitting on some impressive profits. The company has split its stock two-for-one an unprecedented three times over the past year, with two of the splits coming just since Christmas. Adjusted for the splits, the stock has gone from just north of $10 a year ago to a recent high above $150. Nice.

Business Description

JDS Uniphase is the world's leading supplier of optoelectronics equipment for the fast-growing optical fiber-based communications industry. It sells source lasers, modulators, pump lasers, and other related products that are used by communications firms to create and upgrade fiber optic networks. The source lasers create light; the modulators "shape" the light into a signal; and the pump lasers strengthen signals that travel long distances down optical fibers. Many of the company's products are used to boost the carrying capacity of existing optical fibers.

The company also sells laser equipment that is used in semiconductor wafer inspection and analysis.

JDS Uniphase was created by the July 1999 merger of JDS FITEL and Uniphase. Keeping its corporate lawyers and investment bankers busy, JDS Uniphase has gone on an extensive acquisition spree. Since JDS and Uniphase merged, the combined company has announced or completed no fewer than seven acquisitions. The most recent planned purchase is a $16 billion stock deal to buy E-Tek Dynamics (Nasdaq: ETEK), a firm that also makes fiber optic products.

Financial Facts

Income Statement*
12-month sales: $858.3 million
12-month income: $191.8 million
12-month EPS: $0.27
Profit Margin: 22.3%
Market Cap: $89,364.1 million

(*Pro-forma results)

Balance Sheet
Cash: $885.1 million
Current Assets: $1,228.3 million
Current Liabilities: $222.3 million
Long-term Debt: None

Ratios
Price-to-earnings: 442.1
Price-to-sales: 104.1

How Could You Have Found This Double?

One way investors could have found JDS Uniphase was by reading the Fool's Rule Maker Portfolio reports. In that daily column, fellow Fool Phil Weiss put JDS Uniphase through the fairly stringent Rule Maker criteria several different times, with his first analysis coming last September. Each time Phil came to essentially the same conclusion -- JDS Uniphase looked like it was positioned quite well.

Even if one didn't care to listen to a mere Fool, famed technology futurist George Gilder called Uniphase the "Intel of the telecosm" in a widely distributed article for Forbes ASAP magazine back in the summer of '98. In that piece Gilder predicted what today seems fairly obvious -- namely, that optical networking was about to take off, and that Uniphase was in the process of collecting all the components needed to dominate its corner of the fiber market. The numerous acquisitions have continued for the company, and it now appears that JDS Uniphase has created a highly defensible and leading position in a hypergrowth industry.

Where to From Here?

It's not much of a stretch to see JDS Uniphase continue on the acquisition trail. Buying up complementary companies and potential competitors has been an extremely effective modus operandi to date, although there is some question about how many more deals of E-Tek size can be done without raising antitrust alarms. In fact, the E-Tek deal itself is in no way a sure thing, as the merger must get the nod from the trustbusters at the Justice Department.

Even without E-Tek, JDS Uniphase has created a combination of businesses that is likely to dominate its niche for some time. Technologically, it appears the company is several years ahead of its competitors. Plus, the company can sell combined optical products that will offer a unique value proposition to its customers. The bottom line is that the company's competitors face a high barrier to entry into JDS Uniphase's market.

The company picked a darn attractive market to corner, too. JDS Uniphase stands to benefit greatly from the enormous high-speed network building boom that is expected to continue for many years. According to sources at the company, the market for all fiber optics hardware is expected to roughly quadruple over the next three years, creating a market opportunity somewhere north of $20 billion. With that much growth ahead, the company does face somewhat of an execution risk. Managing that kind of growth while maintaining profit margins is always a challenge.

Either way, JDS Uniphase certainly appears to be a top-shelf company today. Even if the company does make its fiscal 2001 profit estimates of $0.55 per share, that would mean the stock is still trading over 200 times its forward earnings. This may not seem like such an insane valuation if the company can maintain 50% or higher annual growth over the next five years, but it is nevertheless a lofty price tag with plenty of future optimism already built in. Then again, top dogs with great positioning rarely come cheap.

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