I'll give the company a point for each of the criteria it meets. And off we go....
1. Dominant Brand -- As Internet users, you or I may not know if JDSU's components are used in any broadband equipment that connects us to the Internet. But, I'm pretty sure that JDSU's customers -- such as Lucent, Nortel, and General Instrument -- are quite familiar with JDSU and its source lasers, amplifier pump lasers, and other such devices that form the basic building blocks of fiberoptic networks. JDSU's business is 50% bigger than all the rest of the independent optical component makers combined.
Just compare JDSU's sales to that of its competitors in this Rule Maker analysis I prepared for the company. It should be noted that JDSU also competes with large companies that have businesses extending beyond the optical components that JDSU sells. In fact, some of these larger companies are both customer and competitor to JDSU. These companies include Nortel, Corning, Lucent, and Pirelli. Even if you consider these other competitors, JDSU is still the market leader. That deserves a point.
2. Repeat Purchases -- As I mentioned, JDSU doesn't sell to consumers. Further, it's products are not quickly consumed and refurbished. For example, some of its components are rated to last more than a century. These aren't the makings of a traditional repeat purchase business. JDSU's customer base is highly concentrated, with about 120 worldwide customers in all. That's certainly a risk of investing in the company. In order for JDSU to be successful, it must continue to receive orders from these customers and meet their demands. Its repeat purchase business is based upon the continued growth of the Internet and the belief that there will be strong demand for bandwidth and the broadband equipment that delivers it. On those grounds, I'm giving JDSU a point here.
3. Convenience -- Convenience is actually one of the key tenets in JDSU's overall strategy. JDSU aims to sell complete products that incorporate as many optical components as possible, thereby enabling customers to better integrate JDSU products into diverse optical equipment. In addition, JDSU works hard to successfully develop and maintain long-term relationships with its customers. These relationships begin at the design-in phase and evolve based upon customer needs. JDSU is able to provide direct service and support to its customers through its offices in North America and Europe. It also has a subsystems distributor in Japan that assists in the performance of support and service functions. Give 'em another point.
4. Expanding Possibilities -- Thomas Jefferson once said, "I like the dreams of the future better than the history of the past." I agree wholeheartedly. This is one reason that I'm not a big fan of backtesting. While the past can be full of many wonderful memories, and can even give some indications of what future results will be, I much prefer to look towards the future. As a result, my view is that when we invest for the long-term, it is extremely important to make sure that we're comfortable with and understand the future opportunities available to our companies. I want to see a future so bright that you gotta wear shades. And that's exactly what I see for JDSU.
(It should be noted that in no way does this mean that I think one should forego analysis of a company's past performance when researching potential investments. We can learn much about a company's potential by looking at its past performance. In my view financial statements are one of the most important such indicators.)
Let's take a look at the some of JDSU's future opportunities. In this interview, JDSU CEO Kevin Kalkhoven stated the following:
"Bandwidth is going to be the next big revolution in technology. We are the leading supplier of very complex fiberoptic technology to the industry and we believe that it is going to be as significant or more important in time than the silicon industry."
Kalkhoven believes that we are moving from a computer-centric world to one that is bandwidth-centric. As a result, network service companies need to supply their customers with more and more bandwidth. This leads to a requirement for more and more complex equipment from telecommunications companies. The end result for JDSU is that these companies need the components that will enable them to provide the bandwidth that their customers desire.
Kalkhoven has said that the demand for JDSU's products is so great that it's almost being forced to double its capacity every year for the next couple of years. It intends to meet this goal through a combination of plant expansion, increased automation, and acquisitions. The market opportunity appears to be enormous. According to Jozef Straus who is in charge of JDSU's manufacturing operations, the market for fiberoptic products is expected to quadruple to $21 billion by 2003.
If you take a look at this article, you'll see some long-term growth estimates for the active and passive optical components that JDSU makes. The estimated average annual growth rate from 2000-2025 -- yes, the next 25 years -- is 18% for active components and 20% for passive components. All I can say about that is WOW!
Let's play with some numbers for a second and think about what this could mean for the company. In its September quarter, JDSU had sales of $230 million. If we annualize that we get $920 million. Growth of 18% per year for 25 years from that starting point would result in nearly $58 billion of sales. At 20 percent, the final sales figure would be close to $88 billion. While these are only estimates, and many things can and will change over the next 25 years, it's certainly apparent to me that JDSU has Expanding Possibilities. Unfortunately, even with a future like this our scoring system limits me to giving JDSU only 1 point here. :-)
5. Your Familiarity & Interest -- Of the five criteria that I'm discussing tonight, this is the one that's the most subjective. Before I started studying JDSU's business over the summer, I can't say that I was all that familiar with what the company does. But, after reading just one or two articles about it (including a Fool StockTalk with CEO Kalkhoven), it had my interest. Now that I've done the research I have to say that I'm at least a little bit familiar with the company. What this reinforces to me is that any Fool who wants to put in the time can get an understanding of what a company does and what its future may hold -- even if its business is outside her normal circle of experience. So for me, JDSU gets a point here, too.
Final score -- 5 out of 5. So far JDSU looks pretty good. However, this stock is very volatile and its future is not a sure thing. If you're considering adding this stock to your own portfolio, I strongly suggest reading the company's 10-K Business Description, beginning with the section called Risk Factors and on through to the end. Next week, I'll be back to discuss the numbers that make up our five quantitative investment criteria.
Before closing, here are a few further comments on JDSU.
After last week's column, there were concerns about Rule Maker Cisco (Nasdaq: CSCO) being one of JDSU's competitors as a result of its acquisition of Pirelli's optical systems. This is not the case, as Pirelli retained its optical component business. Cisco may well be a customer of Pirelli's components business as well as a supplier of systems to its Submarine business. But, overall this news should be good for JDSU -- as well as the rest of the optical component makers -- as it's likely that more of Pirelli's optical systems will be sold by Cisco than were sold by Pirelli.
One other point I should note is that my last column mentioned that light moving through fiber could be broken down into 96 colors or channels. That's understated, as it's actually up to 128 colors -- and could well go higher.
In the news tonight, Intel (Nasdaq: INTC) reported earnings. The Drip Portfolio will give you an early report of how the fourth quarter shaped up.
One last story of interest that you may want to check out is Lessons from Lucent -- A Motley Fool Special Report, written by Rule Maker writers Bill Mann, Matt Richey, and Chief Rule Maker Tom Gardner.
Have a Foolish night.
Phil Weiss (TMFGrape on the boards)