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Tickers in this Article: JDSU
Good news was hard to come Tuesday when the Dow dropped nearly 400 points. People were grasping for any positive story and that's probably why the market embraced telecom equipment maker JDS Uniphase (Nasdaq:JDSU), transforming a mediocre quarter into a gem.

JDS Uniphase managed to beat analyst's estimates by about a dime (22 cents versus 12-cent expectations), and on the news, the stock was up almost $2 to $12.10 per share in after hours trading. But unfortunately, after a closer look at the earnings release and management's comments, I'm left unimpressed.

Little Margin For Error
The first thing that stands out to me is the company's gross margin, which came in at 46.3% of sales in the latest quarter. To be clear that's a 500-basis-point sequential improvement over the 41.3% it kicked out in Q1, and an almost 600-basis-point improvement over the 40.6% it reported in Q2 last year. That's decent improvement, but it's important to note that last year's Q2 isn't exactly the best comparison; after all, demand was sluggish and total sales were down 9%.

These results pale when you think about the big picture and compare them to the 51.4% gross margin JDSU enjoyed in the second quarter ended December 2000. It just shows that the company has a long way to go if it wants to generate substantial and consistent bottom line income. (For more on margins, check out Measuring Company Efficiency.)

JDS Uniphase's proponents would probably call me nuts, and say that the latest quarter proves the company is on its way to getting back to that level of 50%+ gross margins. However, given the economic slowdown, which is bordering on recession, and what I think will be a slackening in demand for its products over the next couple of quarters, I wouldn't count my chickens just yet. Business slowed down just after 9/11 when the economy entered a bit of a tailspin. Check out the bleak numbers from the company in its fourth-quarter earnings press release from 2002. It can be argued that we are entering a similar, and portentially worse, slowdown now.

Hedging its Bets
In conjunction with its second-quarter numbers, the company said that its third-quarter revenue should come in between $380-402 million. That's in line with the $387.9 million that analysts had been expecting. However, exactly which side of the coin things will end up on (ahead of or below that estimate) remains unclear.

The $20 million potential variation is similar to guidance the company gave last quarter, but it seems like a weak forecast that won't lure the sell side to increase its ratings or its estimates, both of which could really drive the stock.

Management's unwillingness, or perhaps inability, to provide tighter guidance is a big issue because JDSU already has credibility problems that it must overcome. I imagine many retail and institutional investors still feel burned after the company completed a 1-for-8 reverse split back in 2006. (For more on these corporate actions, see Understanding Stock Splits.)

What's It Worth To You?
A quick look at the balance sheet shows that total shareholder's equity at quarter end stood at $1.796 billion. However, if I subtract out goodwill ($724.7 million) and other intangibles ($381.5 million) I get $689.8 million. Follow me so far?

Then if I divide that number by the number of diluted shares (228.4 million) I get what I would call a more tangible book value of $3.02 a share. Frankly, given the current stock price, that's not overly impressive. (For more, see Testing Balance Sheet Strength.)

However, it's important to note that the company also lists another $203.3 million in plant, property and equipment on its books. That might not be an accurate reflection given the recent tumble in real estate prices over the last year or so, particularly where the company is based in California. If the economy does continue to slow, I think the investment community will be looking to the company's assets as a safety net, and overall I'm not too impressed.

Bottom Line
JDS Uniphase certainly improved on it's previous quarter; however, I don't find this progress overly impressive compared to where the company has been. I'm also concerned that if the economy does continue to slow, JDS Uniphase's balance sheet won't cushion a fall.

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