JDS Uniphase Corp.
In Reply To:
Stop Predicting, and Keep Buying

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By Newsman
September 25, 2002

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rtVandelay wrote:

Sorry, but I'm sick and tired of this blind "buy at whatever price" mentality. I am long JDSU, but I am harboring no illusions of success. And I certainly wouldn't recommend to anyone to keep buying a stock in an industry such as this without being fully aware of the risks, especially at what remains a rich valuation, IMO.

A rich valuation? You have got to be kidding me.

The company has zero debt. The company has $1.04 in cash per share, meaning the current market price of roughly $2 values the business enterprise at 96 cents per share or so. Sales per share for the trailing 12 months, crappy as they were, were 82 cents, for an enterprise value of just over one times sales. The book value (the liquidation value of the company's assets) is $1.80 per share, and this is a pretty reliable number given that the company spent a year writing off all the billions in BS goodwill pursuant to the new SEC rule.

Also, the company is burning through its cash trove very, very, very slowly. This will permit it to stay in business for years, even at this level of business, which I don't think can continue much longer than a year more. (If it likes, it can also snap up small, valuable acquisitions at bargain prices.)

In the past few weeks and months, we've heard every Alcatel and his brother exiting from or drastically scaling back their optical components businesses. This leaves JDSU as the "last man standing," and hastens the time when its business will pick up. A greater share of future business (what business there is) must go to JDSU, because there are fewer alternatives. So even if the industry stays at this level, more companies will be forced to shift their biz to JDSU, which will hasten the upturn in JDSU's business.

All of this strengthens JDSU's position as the dominant supplier of optical parts going into the future. And when good times return, the company will be so lean that it should be able to be very profitable. The only real threat I see on the horizon is Intel. I would not be stunned to see Intel offer to buy JDSU, which also would probably include a sweet little premium from the current price.

I consider that a pretty reasonable investment thesis. But sure, it's a turnaround story, and you might find it speculative. So be it. I'm willing to risk 96 cents a share on it and keep an eye on it to see if any evidence surfaces that my theory is wrong.

Stocks don't usually get this cheap, much less cheaper than this. It's so cheap because people are frustrated with the company over this long slump and mad at it. I made a case here that the company was fairly valued around $5 for a long-term investor, and I still believe that's right (especially because we are closer to the recovery now than we were in February when I wrote it). I think you'll see the price back around $5 within a year (150 percent return wouldn't be bad in this market) once people become more rational about the outlook for the telecom industry in the Internet age over a several-year time span and JDSU's improved position once carriers begin spending again.

The time you can make the most money in stocks is when you realize most people in the market are wrong about a company and bet the other way. Right now, the market is writing off JDSU as if it will quickly go out of business. I think the market is wrong.

I'm curious: What do you think the company's worth, and what analysis can you offer to back that up?


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