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12/7/2003
07:39 PM
William Schaff
William Schaff
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Taking Stock: JDS Uniphase Still Faces Problems

We're finally coming into the home stretch. The Nasdaq 100 index is up almost 45% through the end of November. And an old favorite of tech investors from the last bubble, JDS Uniphase, a designer and manufacturer of advanced fiber-optic components, modules, and subsystems, is looking like one of this year's modest winners.

JDS sells primarily to the communications and cable-systems markets. Though its products are used in many industries, the biggest market has been in telecommunications, and telecom capital expenditures have sunk over the last few years. Now, I know what you might be thinking: The stock is up 39% this year through Dec. 1. JDS is improving or investors wouldn't be bidding up the stock. Unfortunately, I don't agree.

For the first fiscal quarter of 2004, ended September, revenue was only $147.4 million. Not too bad, except that managers said that for the company to break even on a non-GAAP (generally accepted accounting principles) basis, earnings before interest, taxes, depreciation, and amortization would need to be at a $200 million-per-quarter sales rate. Some investors mistake this for cash flow, but it's not. This doesn't include any taxes or interest paid, nor does it include changes in working capital. In fact, the latest quarter showed a decline in revenue on both a sequential quarterly basis (-8.7%) and a year-over-year basis (-23.8%). In my opinion, it may be very likely that JDS can't get to a $200 million run rate per quarter until fiscal year 2005.

My poor outlook for revenue is supported by the fact that many of the company's markets are still struggling. Traditional telecom carriers are still reducing capital expenditures and slowing their development of third-generation networks.

The company had success cutting costs, but it still had an operating loss of 1 cent per share in the latest quarter. The consensus First Call earnings-per-share estimate for fiscal 2004, ending June, is a loss of 5 cents. Wall Street analysts are a little more optimistic for fiscal 2005, with an EPS estimate of 1 cent. Not exactly a robust turnaround.

But such estimates may be way off, so consider one more item. Though JDS still has a ton of cash on the balance sheet, the amount has steadily declined over the past two years. It ended the last quarter with $1.16 billion in cash and equivalents, down from $1.23 billion the previous quarter and $1.8 billion at the end of 2001. The $1.16 billion still represents about 81 cents per share in cash, and book value is stated at $1.17 per share.

The company recently raised more than $400 million in a zero-coupon convertible bond due in 2010. It plans to use the proceeds for research and development, working capital, and investments. But isn't that what the $1.16 billion is supposed to be for? Though the capital may be cheap today, if the company can't reinvest it for a positive return, the cost of the capital will end up hurting current shareholders.

At $3.43 per share, JDS may seem cheap, but it still looks overpriced to me.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

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