JDS Uniphase Descends The Ladder (JDSU)

| About: JDSUD (JDSUD)

Shares in JDS Uniphase (NASD:JDSU), which makes communications components, modules and test systems, customer optics and commercial lasers for the telecommunications, data communications and cable TV industries, ran from $2.98 on February 23 to $4.18 on March 29. Because the stock trades over 62 million shares a day, there was quite a consensus that the company's fortunes were improving.

However, the stock is now back at $2.77. In the intervening period, the company has sold $375 million in convertible 20-year notes. And tech stocks in general have certainly taken a tumble.

But investors might have expected that the market would cut JDSU a little slack. Fiscal Q3 (3/31/06) revenue rose from $166.3 million a year ago to $314.9 million. Gross profit was even better, going from $24.8 to $115.5 million. On an EBITDA basis, JDSU swung from a loss a year ago of $19.8 million to a $7.9 million profit.

The company guided that revenue in fiscal Q4 would be $302 to $322 million. Not much movement from the quarter just reported, but the June 30 2005 quarter was only $170.9 million and the company had a huge operating loss of $109.7 million. So, the movement from last year should be considerable at both the top and bottom lines.

The new debt and the modest guidance are only part of the issue that pressures the JDSU shares. It is a stock in which a lot sharp traders have been badly burned.

In early 2001, the stock dropped from almost $23 to just above $5. Before the end of 2001, the stock recovered to almost $12, but it was below $2 less than a year later. The stock was above $5 again in January 2004, but was below $2 by the early part of 2005.

The financial recovery and share prices of JDSU and competitors like Bookham (NASD:BKHM), Conexant (NASD:CNXT) and Finisar (NASD:FNSR) has been decidely mixed. Most are up over 50% in the last year, but JDSU certainly lags behind the gains of Finisar.

Wall Street is concerned that the fiber optics recovery might be a mirage. The news of the build-outs by the telcos is there. Bandwidth prices seem to be getting tighter which benefits companies like Level 3 (NASDAQ:LVLT). Storage and streaming usage has spiked thus feeding the share prices of companies like Akamai (NASD:AKAM). In other words, all of the building pieces are in place.

The market is wise. Margins for these companies have been killed before when competition for large customers drove discounting. JDSU actually had negative gross margin in fiscal 2002. In fiscal 2003, gross profit was well under 10% of revenue. Gross profit in 2000 had been 47% of revenue.

Top line is not the whole game for JDSU. The recent improvement in margins is good news. But investors are worried about whether it is permanent.

JDSU 1-yr chart:

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.