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The Premise

2011 certainly hasn't been a dull year for JDS Uniphase (NASDAQ:JDSU). The optical networking focused darling of the '90s surged up from the high single digits in late 2010 to almost $30 in the spring of 2011, only to revisit and bounce around those lows in the high single digits yet again through fall and much of December 2011.

There are all the usual suspects in terms of reasons the street should have anxiety about the stock - end customer uncertainty, geopolitical strife, supply chain and on and on. But enough of all that - the best time to buy is when there is blood on the streets (as long as you can peek around and make sure the armed marauders have left).

The Pitch

So let me give you six reasons why the future looks a lot rosier than the past.

  • This is not your father's JDSU. Stock superstars of the past resemble child superstars - they bear the cross of being typecast for the rest of their lives, even as they have grown beyond their adolescence. JDSU is no longer an optical one-trick pony. Investing in this company is a call option on 3 fast moving streams -- the reinvestment in optical infrastructure after many years of overbuilding; the next generation of wireless namely 4G LTE, to satisfy all those bandwidth hungry smart phone applications; and the next generation of video applications that are driven by gesture recognition (think Microsoft Kinect, which is a JDSU customer).

  • Environmental View: Thailand Floods were bad, but The Street adjusted for worse. The tragic events in Thailand affected the manufacturing capacity of several optical networking companies, causing uncertainty and sales reduction to the tune of $35-45M. However, as pointed out in this recent article featured in an optics trade newsletter , JDSU's newer Pinehurst campus is recovering substantially faster than other companies that are using the older Chockchai campus for contract manufacturing.
  • Technical View: Capitulation, Done, Bounce next? A number of analysts and knowledgeable amateur investors are beginning to call a bottom on JDSU. SA contributor Bret Jensen points out that JDSU is a solid buy under $10, where it is selling near the bottom of its 5 year range based on P/E, P/S and P/CF. SA investor Kapitall points out the a bullish short term trend in terms of reduced short interest, indicating that short sellers are more bullish on this stock than in previous months.
  • Fundamental View. As mentioned above, JDSU spans a number of promising growth areas. An investment in JDSU can be thought of as a call option on three fast moving streams. And as the table below (taken from the recent analyst presentation at a Barclay's conference, detailed slides available at the JDSU investor page) indicates, their presence in these three areas is substantial, and the growth upside meaningful.
Business Segment Total Addressable Market (NYSE:TAM) Current Revenues (millions) Target Growth Rate
Communication & Commercial Optical (OTCQB:CCOP) $8B $190M 16-20%
Communication Test and Measurement (CommTest) $7B $215M 20-23%
Advanced Optical Tech (AOT) $6B $55 32-35%
  • Earnings View: Light at the end of the tunnel? A recent analyst presentations in late November and early December seems to have positively influenced the predictions of several analysts (visit the investor section on JDSU's site to download these presentations). A UBS analyst came out on Dec 6th with a buy recommendation and a target of $13. And a Jeffries analyst came out on Dec 9th with a buy recommendation and a $14.75 target based on the revenue potential for gesture recogniation technologies.
  • 3 Words: AT&T. T-Mobile. Nada. It seems like the justice department wants less, not more consolidation in the US market. This means more customers, more competition, more capital investment, more bullish for optical and test technology vendors. The positive fallout of this might take a few months to play out, but the positive impact could be substantial.

There are no certainties in life or the stock market, and if there are then they have already been discounted by the stock market. That said, the risk-reward in JDSU seems like percentage points on the downside (10-20%) but a potential multiplier (2x-3x?) on the upside. JDSU in particular is a diversified player in a volatile but high potential sector, and the beneficiary of smarter devices, smarter networks and the video explosion.

Source: 6 Reasons To Take A Shine To JDS Uniphase