Why JDS Uniphase Is A Sell

| About: Viavi Solutions (VIAV)

Fiber optics component supplier JDS Uniphase's (JDSU) year went from bad to worse in October. Uniphase reported impressive first-quarter results, but a weak guidance led to a massive drop in the share price. Moreover, with rival Finisar (NASDAQ:FNSR) seeing a rebound in demand for its telecom products, Uniphase investors might worry that it might be losing market share to its peers.

Worrying signs

Uniphase cited weak orders from North America for its test and measurement solutions that serve the telecom industry. As a result, Uniphase saw a 9% drop in revenue from its network and service-enablement business, which accounts for 40% of overall revenue.

These test and measurement solutions are primarily used by telecom carriers. This is why a drop in demand in this segment isn't an encouraging sign since telcos in North America are deploying LTE networks, apart from spending money to make their existing network more efficient. Moreover, Uniphase's overall book-to-bill ratio in the previous quarter remained below 1, indicating that the company isn't seeing much demand for its products.

At the same time, rival Finisar is seeing good traction in its telecom business. When Finisar reported its second-quarter results, it saw a 25% increase in revenue. Considering that its telecom business had dropped 12% on a sequential basis in the fourth quarter, this increase is commendable.

Finisar rounded off its robust quarterly report with an outstanding outlook. It guided for revenue between $290 million and $305 million, ahead of the $290 million Street estimate. Also, its earnings guidance of $0.43-$0.47 per share convincingly exceeded consensus expectations of $0.38 per share. Finisar expects its telecom business to get better in the future on the back of clients such as Ciena and demand from China.

A few positives to note

So, Uniphase isn't doing as well as Finisar and has been under pressure since its latest report. However, it expects things to get better in the long run. Uniphase is counting on an increase in demand for network bandwidth. It believes that the deployment of small cells by telecom carriers and the roll out of LTE will eventually lead to greater demand for its products.

Uniphase is correct in its assessment of what could drive demand for its products. For example, Verizon (NYSE:VZ), which operates the largest 4G network in the U.S. covering 500 markets and 301 million customers, is still working to make its network more efficient. Earlier this year, Verizon management stated that they will begin deploying small cells in the second half of the year as it looks to boost capacity and coverage of its LTE network.

This initiative should help Verizon improve network speeds and catch AT&T, which is deploying its own small cells. AT&T is in the process of deploying 40,000 small cells over the next three years. Thus, component suppliers such as Uniphase stand to gain from the telecom wars in North America. But sadly, Uniphase doesn't have a strong order book as of now to benefit from these deployments.

Uniphase is also optimistic about its data communications business. The growth in data centers is leading to strong demand for Uniphase's optical communication products. The company expects this segment to grow further as data centers become more complex and the need for connectivity and capacity within and between data centers increases.

Not good enough

But despite all this optimism, Uniphase doesn't look like a convincing investment right now. The stock is expensive at 45 times earnings, its revenue growth slowed down to just 1.90% year over year in the previous quarter, and the order book doesn't paint a pretty picture with a book-to-bill ratio of less than 1.

As such, it would be prudent for investors to take their money out of Uniphase and instead invest in a better optical networking play such as Finisar.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.