Listen to the professionals, and you'll assume that JDS's $0.13-per-share loss and 11% sales growth justify Thursday's 13% haircut. But that's just one quarter's news -- a brief speedbump on the highway to JDS's prosperity ...
Exit, stage left
... if JDS were on that highway in the first place. It's not. Let's take a break from Wall Street's short-term thinking here for a moment, and look at the bigger picture. Over the course of its fiscal 2008:
- JDS grew revenue 9.5%
- It tacked on nearly five percentage points to its gross margin (currently 38.6%).
- But it posted an operating margin of negative 8.6%, and lost $0.10 per share.
How did JDS turn better gross margins into an even bigger operating loss? By allowing its costs to run amok. R&D spending increased 12% -- but I've got no objection to that. Tech firms need to invest in their tech. But I don't like that JDS increased its selling, general, and administrative spending at twice that rate -- 24%. This surge in operating costs has JDS now posting an operating margin worse than those of Agilent
And by the way, where's the cash?
In addition to its continuing GAAP losses, we have a new reason to chastise JDS today. Remember what I wrote in Tuesday's Foolish Forecast? "Unless we learn tomorrow that free cash flow has fallen off a cliff, this means the buying window remains open to us"?
Well, FCF fell off that cliff. Trending toward $33 million as we headed into Q4, JDS instead generated a bare $9 million for the quarter. (Management has not released the most recent quarter's cash flow statement.) My best estimate now puts free cash flow for the year at $108 million.
Simply put, JDS's projected 15% growth rate does not support its new 21-times-FCF valuation. Until it does, I can't support the stock.
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