Is This Fiber-Optics Company a Good Long-Term Buy?

After a promising start to the year, this fiber-optics company has hit a speed bump. Can it make a comeback?

Jun 21, 2014 at 4:00PM

Communication testing and networking equipment company JDS Uniphase (NASDAQ:VIAV) is an epitome of inconsistency. It exited 2013 on a negative note, but started the New Year on a high. However, when it seemed as if everything was going right, Uniphase came up with shocking third-quarter results recently, missing Wall Street estimates.

Earlier this year, it looked like Uniphase is all set to benefit from the roll-out of TD-LTE in China by China Mobile (NYSE:CHL), along with growth in gesture recognition solutions. The company said that it was seeing strong demand for fiber-optics components and testing equipment back in January, but changed its tone in April. What might be the reason behind this sudden change in Uniphase's forecast?

A surprising slowdown
Uniphase attributed its weak performance to a delay in orders and carrier spending budgets. Orders came in later-than-expected and this hurt the company's performance in the third quarter, and forced it to issue a shallow outlook. 

In fact, Uniphase guided for revenue between $425 million to $445 million, significantly behind the $459 million Wall Street estimate. Its earnings forecast left a lot to be desired as well. The company expects earnings in the range of $0.10 to $0.14 per share, but consensus estimates called for $0.17. 

What's surprising is that Uniphase put in such a pitiful performance even as its rival, Finisar (NASDAQ:FNSR) has gained solid traction in the fiber-optics components market of late

Competition from Finisar
It might be possible that Uniphase is losing market share to Finisar, and it won't be the first time if this is indeed the case. Finisar seems to be riding positive trends in the telecom and data communications industry with confidence. The company had issued a robust outlook the last time it reported earnings.

This doesn't come as a surprise since Finisar is on track to benefit from network upgrades by several telecom players, both in the U.S. and abroad. In addition, it might be in a better position to profit from the roll out of fiber services by the likes of AT&T and Google as compared to Uniphase. According to Raymond James and Associates, Finisar has the highest exposure to optical-network spending among peers, counting customers such as Ciena, Cisco, and Huawei

In addition, Finisar is seeing strong adoption of its 100G switches, and its focus on product innovation should ensure robust sales going forward. After launching new 100G transceivers, such as its CFP2 LR4 product, earlier this year, Finisar started working on the next-generation CFP4 product. Given its rapid product development moves and a base of solid customers, it is likely that Finisar might be outpacing Uniphase.

A benefit of doubt?
Uniphase bulls might consider giving a small benefit of doubt to the company. Management says that the company was a victim of "magnified seasonality," but things should improve going forward. Uniphase saw lower orders from a couple of customers in North America, but this might be a blessing in disguise. 

The company believes that the delay was due to the metro build-out. Telcos such as AT&T are planning to deploy high-speed networks across the U.S. and this could lead to better times for Uniphase going forward. In addition, the company's bookings have also improved. At the end of the third quarter, Uniphase's order book was up 7.5% from the year-ago period.

It is seeing strong demand for some of its products, such as location-intelligent software solution and 100G products. In fact, Uniphase started shipping its 100G products to China for the build-out of the LTE network. Now, this is a long-term opportunity.

China Mobile, the country's biggest telco operator, is building the world's largest LTE network, with a planned expenditure of $13.4 billion by the end of the year. The bulk of this expenditure is slated for the second half of the year, according to Barclays.

The LTE roll out in China is still in its early phase. China Mobile is still in the process of building 500,000 base stations to cover 350 cities with its LTE network. Once the deployment is complete, China Mobile will continue investing to make the network more efficient, which will open up more opportunity for Uniphase.

Final words
Uniphase's last quarterly report was bad, but there were a few silver linings. However, it would be wise to watch the company from the sidelines. Uniphase is trading at an identical earnings multiple to Finisar, but the latter is a better pick considering its consistence performances. As such, investors should steer clear of Uniphase until and unless it puts up a couple of consistent quarterly results.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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