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JDS Uniphase
Taking a Stab at JSDU Minimum Value

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By Newsman
February 11, 2002

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Because JDSU doesn't have positive earnings (even pro-forma) right now, many have said recently how difficult it is to try to put a fair price on this company. I am offering a bit of my own analysis in hopes of starting a discussion during which people take a stab at offering their own answers to that question.

The book value of the company at the end of calendar 2001 (the quarter whose numbers I use through most of this analysis) was $8.978-billion. After the much-ballyhooed goodwill writedown of 50-billion plus last year, this number is a much more useful and likely much more accurate number than it has been in the past, representing accountants' estimation of what the company assets truly are worth. At $6.46 a share as I write this, the market cap of the company stands about $8.576 billion, meaning the shares trade at a discount to the company's book value. You could argue that that represents a good deal, or at least a fair one.

Say you still don't trust book value that includes goodwill. Back out the goodwill of 5.142-billion, and you end up with 3.836 billion. That includes a billion dollars worth of buildings and equipment, about 1.6 billion in cash, 372 million in inventory and collectable accounts receivable and some tax credits. So the company is trading a bit over twice the value of its hard assets and the money it is owed. The value of the company's cash alone is $1.25 per share.

Stocks go to zero when there are bankruptcies, and bankruptcy is for overloaded debtors that can't pay their bills. This company has ZERO debt and so is at NO risk of going bankrupt. So zero is an unreasonable floor for the stock price. What is? It would be madness for the share price to drop below $1.25 per share, the per-share value of its cash. There's an excellent argument that $2.90 per share would also be way, way too low, because then the company would be trading for book value minus goodwill, giving ZERO value to the fact that this company is very much a going concern selling products and generating cash flow. The 52-week low share price of $5.25 was reached last fall when we were much further away from a turn in the telecom industry than we must be now, when we wondered about the actual future of our nation. So would be startled to see the shares go lower than that again at this point.

In the quarter ended June 2000, the company posted pro-forma earnings of 14 cents per share on sales of 524 million. Management is not sure when it will reach those sales levels again, but with the streamlining and gain in market share during this downturn, I think it will be able to earn 14 cents a share during a quarter at lower sales levels than before, maybe at a sales level of 450 million per quarter. To me, this seems like a reasonable level to expect in a more normalized capital expenditure environment, (as the Internet and the need for telecom capacity grow, I expect that to triple or quadruple). But at this .14 per quarter of earnings, annualized, the company would be earning 56 cents per share, which yields a P/E of 11.5 given today's share price.

So if you write off the rest of calendar 02 as a crappy business environment, which is probably wise, and assume calendar 03 or 04 earnings in the neighborhood of 50 cents a share, the stock looks certainly fairly priced, if not a downright steal. Those kinds of earnings would probably support a stock price of $15, which would be 30 times current year earnings, well over a double from the current price.

Given that the company is at absolutely no risk of going bankrupt, that the recession can't last forever, that using more telecommunications services saves all the other companies of the world lots of money, and that that absolute maximum downside from here seems to be 50 percent (and likely will be no more than the 18 percent drop needed to revisit the 52-week low) it seems to me that the potential for this stock to rise far outweighs the risk that it will drop a lot further, putting me in the mood to buy some shares. Naturally, I wouldn't do this with the rent money, but with money for which I have at least a four or five-year time horizon.

Pick this apart, and/or give me your own analyses. Thanks in advance.

--Newsman

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