My column last week was titled "Gigantic JDS Uniphase" by our fine editing department, and the term was appropriate on many different levels. This company is big, does things in a big way, has enjoyed big success, and is looking for big things in the future. Its sizable growth, both internally and through acquisition, is an issue that draws both optimism and concern from interested observers.
It is, in fact, due to its gigantic growth in share price that JDS Uniphase (Nasdaq: JDSU) has been able to increase its size by swallowing smaller companies and paying the dinner tab mostly with its own stock. This growth by acquisition has allowed the company to offer a wider range of products and streamline production by combining technologies and resources.
Accounting for acquisitions
The mergers are not without drawbacks, however. In the short term, the number of mergers makes it somewhat difficult to get a real feel for how the company is performing as a whole. The fourth quarter of its fiscal 2000 earnings report, for instance, contained no less than six versions of the income statement for you to comprehend. The company is one of the more difficult to analyze, because it uses the "purchase" rather than the "pooling" method of accounting for acquisitions.
This is actually a good thing, though, because it paints a clearer picture of each transaction on the balance sheet. However, this also makes period-over-period comparisons basically fruitless after an acquisition. With the many mergers in its recent history and the pending deal with SDL Inc. (Nasdaq: SDLI), the numbers at JDS won't become any less confusing anytime soon.
Of more substantial concern is JDS Uniphase's ability to integrate the many smaller, acquired companies into the fold while maintaining cohesion and focus. Soon after the big merger of equals that combined JDS Fitel with Uniphase, the new company acquiredor merged with 11 other businesses. Imagine adopting a dozen college students and trying to maintain familial harmony, with many of them spread out in various areas of the continent. It would certainly require a lot of communication and guidance without going overboard and upsetting the new members.
JDS Uniphase has increased the size of its family dramatically in a short amount of time, and while the blockbuster deals will likely end with SDL (if it is indeed approved), we shouldn't be surprised to see more smaller businesses brought into the collective. Cisco Systems (Nasdaq: CSCO) has grown successfully, partly through acquisitions. Hopefully, JDS Uniphase has learned from Cisco's methods.
Another direct result of all the acquisitions is the large chunk of goodwill on JDS's balance sheet. The last quarterly report showed just over $21 billion in intangible assets, composed mostly of goodwill. You'll recall from our "Back to Basics" series on noncurrent assets that goodwill is an asset that arises from purchasing a business at a price greater than the book value (or actual net accounting worth). The amount paid over net asset value is goodwill to be amortized (or booked) over a period of time. Writing off this sizable goodwill will cut into future earnings.
The biggest tech merger yet
The potential merger with SDL is big in a variety of ways. Its pure size, at around $40 billion at the time of its announcement, would make it the largest technology merger ever. The potential monopoly of certain component lines, such as the high-growth, high-profit pump lasers that are essential to dense wavelength division multiplexing (DWDM) systems, is very significant to the government's Justice Department. The combined entity of JDS Uniphase and SDL would not only have the 980 nm pump laser market all to itself today, but the barrier to entry for future competition is high, considering all of the research and testing that the two companies have perfected over the years to develop state-of-the-art components.
JDS Uniphase's ambition is sizable. The company has a stated aspiration of quadrupling its manufacturing capacity every 18 months. While this lofty goal is an important investment in the future of the company, there isn't sufficient cash from operations available at this time to fund that growth. This could mean relying on debt to meet its capacity and production goals.
The last big aspect of JDS Uniphase that I'm going to talk about today is the considerable numbers it's generating. The company boasts gross margins of 51%, net margins of 22.5%, and a five-year estimated annual earnings growth rate of 48%. Its full-year earnings estimates were just bumped up 14% from the original estimate, based on better-than-expected results.
These are all impressively large numbers for a company this size. If you listened to the company's conference call, you no doubt heard a degree of optimism in the voice of CEO Jozef Straus regarding the attainability and continuance of this growth due to "big" demand.
JDS Uniphase is an intriguing company to watch, as it remains one of the best-positioned companies in the skyrocketing optical networking sector (which was recently analyzed in a Motley Fool Research Internet Report). The surging share price the past few years reflects optimism of big things to come in fiber optics, as JDS Uniphase wants to be the biggest player in the market. It's just the way they do things -- big.
To discuss the company, visit the Drip companies board or the JDS board.
-- Vince Hanks, TMFElwood on the Fool discussion boards
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