Here's why JDS Uniphase (Nasdaq: JDSU ) might be cheaper than you think.
In the daily noise machine of CNBC, analyst estimates, and quarterly announcements, investors are inundated with talking heads obsessing over earnings-per-share figures.
Earnings, or net income, is an accounting construction that is the basis for the price-to-earnings ratio, the most popular way of measuring how cheap or expensive a stock is.
But free cash flow -- the amount of cash a company earns on its operations minus what it spends on them -- is another, oftentimes more accurate measure of earnings, and it's one that can give you an advantage.
How JDSU stacks up
If JDSU tends to generate more free cash flow than net income, there's a good chance earnings-per-share figures understate its profitability and overstate its price tag. Conversely, if JDSU consistently generates less free cash flow than net income, it may be less profitable and more expensive than it appears.
This graph compares JDSU's historical net income to free cash flow. (I omitted various gains and charges such as tax deferrals, restructurings, and benefits related to stock options.)
Source: Capital IQ, a division of Standard & Poor's, and author's calculations.
Source: Capital IQ, a division of Standard & Poor's, and author's calculations.
As you can see, JDSU has a tendency to produce more free cash flow than net income.
This means that the standard price-to-earnings multiple investors use to judge companies may overstate its price tag.
Let's also examine JDSU alongside a few of its peers, larger customers, and competitors for additional context.
|
Company
|
Price-to-Earnings Ratio
|
Adjusted Price-to-Free-Cash-Flow Ratio
|
|
JDSU
|
N/A
|
154.2
|
|
Brocade Communications (Nasdaq: BRCD )
|
20.6
|
18.0
|
|
Juniper Networks (NYSE: JNPR )
|
38.9
|
30.7
|
|
Tellabs (Nasdaq: TLAB )
|
14.5
|
11.9
|
|
Median
|
29.7
|
24.3
|
JDSU's price-to-earnings ratio is "N/A" because it has negative net income. It is, however, producing free cash flow. Trading at more than 154 times free cash flow, JDSU isn't cheap, but it's probably cheaper than many investors realize.
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