JDS Uniphase: The Selling Is Overdone

By
A A A

This morning’s GDP number was not pretty, showing a 1% contraction of economic activity in the 1st quarter of the year. This wasn’t unexpected and, so far at least, the market seems to have shrugged it off, believing that the next couple of quarters will see a significant rebound. If this is the case for the broader economy, should it not be the case that companies, particularly those dependent on capital expenditure, can be expected to follow the same pattern?

I believe it is, and have been looking for companies whose recent performance and lowered guidance has led to their stock trading at a discount, but where there is reason to believe that they will benefit from a recovery. JDS Uniphase (JDSU), a manufacturer and supplier of fiber optical equipment, is a good example.

It is hard to look at a chart like that below for JDSU and get wildly enthusiastic. The last year has seen big drops, periods of consolidation, then more big drops. Interestingly, though, a look at the earning surprise history for the company would suggest that this is not down to their actual performance.


JDSUJDSU

As is often the case, the stock has been hit as a result of lower guidance, rather than past results. This is understandable; the stock market is, after all, a forward-discounting mechanism, but reactions to lower guidance are the most likely to be overdone. There is always a feeling among traders and investors that even lower estimates for the future from a company will turn out to be optimistic but as the above numbers for JDSU show, that is not always the case.

The board of JDS Uniphase certainly thinks that the reaction to their pessimism has been excessive. On Tuesday they announced a $100 Million share buyback program. Analysts also remain bullish on the company’s longer term prospects, with 7 “Strong Buy” and 5 “Hold” recommendations between the 12 firms with coverage, and a consensus price target of $15.25.

The share buyback will be paid for from the company’s net cash reserves of around $400 million, leaving room for more if deemed appropriate. Actively buying 4% of the float should provide a floor and significantly reduce the risk to buyers of a previously risky stock. This will put the brakes on the skid and limit downside somewhat, but to buy JDSU you have to believe that there is significant upside; I do.

As several of the bullish analysts pointed out, lower guidance was largely down to disappointments in less important (but admittedly high margin) lines of business for JDSU. The core Network Service Enablement (NSE) lines, which account for about 40% of sales, are expecting around a 25% increase next quarter. As demand in that area increases it is reasonable to expect some increased profitability.

I am, by nature, a little cynical. When those with most to gain, the board of a company and analysts with “Buy” recommendations, are the ones bullish on a stock it usually doesn’t bode well. Their enthusiasm often smells of “What do you expect?” In this case, however, it strikes me that JDSU’s board has simply been realistic in cutting the forecasts. Given that they were right then, I believe that they are right now in the belief that the stock is cheap at these levels.

The share buyback program will certainly limit the downside for the stock over the next couple of months and give a chance for general economic improvement to begin improving the outlook for JDS Uniphase. Couple that with the solid organic growth that I and others expect in their core business and you have to believe that the selling, while understandable, is hugely overdone and a recovery in JDSU is on the cards.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Economy , Stocks

Referenced Stocks: JDSU

Martin Tillier


More from Martin Tillier:

Related Videos

Stocks

Referenced

Most Active by Volume

33,110,376
  • $113.99 ▲ 1.77%
25,034,179
    $17.98 unch
24,486,872
  • $7.41 ▲ 2.07%
20,864,535
  • $7.39 ▼ 2.76%
18,600,501
  • $8.30 ▼ 0.36%
17,530,211
  • $8.14 ▲ 3.17%
17,299,208
  • $93.79 ▲ 2.74%
14,669,760
  • $25.78 ▼ 0.19%
As of 12/26/2014, 04:15 PM


Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com