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JDS Uniphase (JDSU): An Attractive Way To Play Optical Recovery

 June 08, 2012 11:31 AM

(By Mani) Shares of JDS Uniphase Corp. (NASDAQ:JDSU) is trading at $10 levels since early May, making it the most attractive stock to benefit immensely from a recovery in the capex spending in the second half of 2012.

California-based JDS Uniphase is a diversified market leader selling communications test equipment and optical components. Its customers consist of large service providers and enterprises, network equipment manufacturers, and governments.

At $10, the stock's valuation has become sufficiently attractive to buy into the second half capex ramp, given the fact that inventory correction is largely over and undershipment of components would soon moderate. The shares are cheap as they are priced 18 times its fiscal 2012 earnings per share.

[Related -JDS Uniphase Corp (NASDAQ: JDSU): Current Levels Attractive Given Potential 2014 Tailwinds]

"We continue to believe that around ~$10 or 10x achievable earnings power of ~$1.00 JDSU remains the most attractive play on the optical capex recovery, with significant leverage to the upside and minimal downside in our view," UBS analyst Nikos Theodosopoulos wrote in a note to clients.

While components continue to grow slower than systems, the supply chain built inventory in the first quarter with systems down a sharp 16 percent, while components grew 4 percent.  

The inventory build is viewed as a healthy signal after a few quarters of significant supply chain inventory reduction. Historically, JDS bottoms in advance of the turn in the cycle suggesting limited downside from these levels.

[Related -Ciena Corporation (CIEN) Q3 Earnings Preview: Can It Pull Off Another Beat?]

For the third quarter, JDS reported a third-quarter GAAP net loss of $17.4 million, or 8 cents a share, compared to net income of $38.6 million, or 16 cents a share in the same quarter last year. On a non-GAAP basis, the company posted net income of $25.3 million or 11 cents a share, in line with Street expectations. Net revenue fell to $409.2 million from $454.0 million in the same quarter last year.

For the fourth quarter of fiscal 2012, ending June 30, 2012, the company expects non-GAAP net revenue to be in the range of $415 million to $435 million. Analysts currently expect the company to report revenues of $427.45 million for the fourth-quarter.

The analyst prefers JDS over its rival Ciena, Inc. (NASDAQ:CIEN) given its valuation and superior profitability. Both JDSU and CIEN are trading on multiples of presumed $1.00 in earnings power which in JDS's case, appears significantly more achievable given it earned 93 cents in fiscal 2011.

Ciena, on the other hand, continues to struggle on profitability given increasingly competitive 100G pricing and as yet limited deployment of its high margin 5430. Still, it would be a beneficiary upon capex ramp.



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