Buying JDS Uniphase On Broadband Demand

 |  Includes: CIEN, VIAV
by: Wall Street Mayhem

JDS Uniphase (JDSU) returned to profitability last quarter largely due to rapid growth of its test and measurement equipment division. The stock is down about 11% since it reported earnings, due to guidance that was slightly below what the Street was expecting.

JDS Uniphase has a market cap of about $3.35 billion, cash of about $1.2 billion, and debt of about $900 million. Although the company does not have a trailing P/E, based on current analyst estimates the forward P/E is about 25.

Two days ago Credit Suisse raised its rating on Ciena from “neutral” to “outperform”. This morning Citigroup raised its rating on Ciena from a “hold” to a “buy”. Ciena shares have responded this morning and are up 4%. However, in the same research note Citigroup goes on to say that JDSU is still their top pick for optical capacity exposure. Citigroup raised Ciena’s rating because they believe orders for optical capacity products are strong and Ciena derives 75% of their revenue from these products.

JDS Uniphase is up a little over 1% today, but it is lagging the gain by Ciena as it has for the last few weeks. Over the long term there is a high correlation between the stocks of Ciena and JDS Uniphase largely because both companies are driven by the underlying demand for optical communication equipment. Recently these stocks have diverged, with Ciena outperforming JDS Uniphase by about 30% in the last three months. We believe that the long term correlation between these two stocks will hold. Although JDS Uniphase took longer to return to profitability than was expected by most analysts, they are still benefiting from the same underlying demand trends that are buoying Ciena.

jdsu vs. cien

Although we still think optical test and measurement equipment pure play Electro Optical Engineering is the best way to benefit from increasing demand for optical capacity related equipment, JDSU looks attractive at these levels as well. Demand for JDS Uniphase’s products should continue to grow and the company has returned to profitability after a seven year hiatus.

The increased demand for JDSU’s products is being driven by competition between cable and traditional telcos to provide all inclusive packages including phone, television, and internet as well as increased bandwidth usage due to the popularity of high bandwidth internet video applications such as You Tube. These underlying trends are showing no signs of slowing down and companies like Electro Optical Engineering and JDS Uniphase are well positioned to benefit from these trends.

Although JDS Uniphase has made mistakes and has lost some market share since its dominance during the dotcom boom, the return to profitability and the current demand trends make JDS Uniphase a buy at these prices.

• BUY JDSU near $15.80
• SELL JDSU at $20, set stop loss at $14.50