Rule Maker Portfolio
JDS Uniphase:
From First Sighting to a Place in the Portfolio
By Phil Weiss (TMF Grape)

TOWACO, NJ (September 14, 1999) -- I'm constantly bumping into new companies that pique my interest as potential investments. Last week, I told the story about how I introduced my investment club to a biotech highflyer, MedImmune (Nasdaq: MEDI). In the context of that story, I explained some of the steps I go through when I first spy a new company that I want to learn more about. This week, I have another such story. The subject of tonight's report is another high flyer (check out the chart) -- fiber optic component maker JDS Uniphase Corp. (Nasdaq: JDSU)

For our club's August meeting, I suggested we study JDSU, a company that first came to my attention when it went by the name of Uniphase Corp., and the Fool did a StockTalk interview with its Chairman and CEO Kevin Kalkhoven.

After reading that feature, I found the company intriguing and put it on my list of stocks I'd like to learn more about in the future.

Although I ordered an investor package from the company prior to our club meeting, it didn't arrive in time for me to go through all the materials (like MedImmune's package, it's chock full of all sorts of helpful stuff). Plus, the company had recently completed a merger, so my research approach had to be a little different this time. Fortunately, the Internet provides a lot of other ways for investors to obtain information.

I started by reading a prospectus for Uniphase's recent stock offering. Unlike Medimmune, JDS Uniphase has an active message board here at The Fool. A few Fools graciously put together a Frequently Asked Questions (FAQ) post about the company, which contains a lot -- 13 printed pages -- of useful information, as well as links to other reference sources. Finally, I went to the Multex website to access some analysts' reports so that I could read a little more about the company's business and its recent merger.

While I'm less familiar with the technical aspects of JDSU's business than MedImmune's, I will share a little of what I learned about the company.

JDSU is a leading supplier of optoelectronics to the fast-growing optical fiber-based communications industry. It sells source lasers, modulators, pump lasers and other related products. 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.

JDSU's products split light into different colors (similar to the way that a prism splits light into a rainbow). Splitting light into more colors allows more differentiated light -- and thus, more information -- to move through the wire. The concept gets into stuff like dense wave division multiplexers (DWDM ), a technology that's been discussed in context with Cisco's (Nasdaq: CSCO) recent acquisitions of Cerent and Monterrey Networks. The advantage of this stuff is that it enables data carriers to increase system bandwidth in a cost effective manner. Best of all for JDSU is that even though its product is expensive, the customer still saves money by using it. The reason for this is that Uniphase's products are used in equipment that has the effect of expanding a two-lane highway into one with as many as 96 or more lanes. JDSU's customers (Original Equipment Manufacturers or OEMs) don't mind paying up for this magnitude of broadband expansion.

Thus, JDSU is able to sell an expensive, high margin products that provide the added benefit of saving money for the user. In other words, JDSU offers its customers a compelling value proposition, which is also a characteristic that it shares with MedImmune. When I look at companies that have not advanced to Rule Maker status yet, this is something that I look for.

There's not a lot of competition for JDSU, and the company is far and away the biggest player in its niche. It's also interesting to note that some of its competitors in one area are customers in another (including companies like Lucent, Ciena, Alcatel, etc.). Due to the nature of the business and technology, it's unlikely that one of these companies would readily take share from JDSU, as there are high barriers to entry due to the cost and complexity of implementing the technology used to make JDSU's components.

Recently, Uniphase closed a merger with JDS Fitel, hence the name change to JDS Uniphase. The merger is perceived to have distinct advantages because Uniphase makes active components while JDS makes passive ones. Combining the two under one roof should increase market share, as customers will have to deal with fewer suppliers. In addition, JDSU can probably charge slightly higher prices due to the consolidation of these two companies.

As part of my research, I also reviewed some of JDSU's historical financial information, as well as the fourth quarter combined financials for the two companies, which can be found in this press release. I didn't find anything that scared me away when I looked through the numbers.

The recent stock offering was for general corporate purposes and possible acquisitions. It's harder for JDSU to make an acquisition by using its stock directly because it's more likely to buy a division of a company rather than a whole company. In that case the seller normally prefers cash instead of stock.

As an interesting added tidbit, George Gilder, a noted technology futurist
with a following among industry watchers, called Uniphase the "Intel of the telecosm." While that kind of stuff should certainly only be taken at face value, it's interesting nonetheless.

One other good source of company information that I didn't specifically mention in tonight's report is the company's website. Oftentimes you can find a lot of great information about a company and its products by checking there as well. Here are the links to the homepages for JDS Uniphase and Medimmune.

And, in case you're wondering, our club also took a stake in JDSU.

That's it for tonight. Disappointed? Well, if you're in the habit of soaking up Foolishness night after night, maybe you should consider the possibility of being a Fool by day. We're hiring writer-analysts, biz dev pros, techie gurus, and more. The best part about being a Fool-time Fool -- no shoes, no shirt... no problem! Check out our jobs page for all the details.

Fool on.