Turnarounds That Haven't Turned Around: JDS Uniphase (JDSU)

There are many companies that have been troubled and involved in turnarounds for quite some time that just never quite seem to get turned around.  Enter JDS Uniphase (NASDAQ: JDSU).  JDS Uniphase is in a true conundrum if you look into the time machine because it isn’t a dirt cheap value stock and it isn’t a high-growth engine. It’s now just an old fiber optics company trying to find its groove.  The good side (or less bad) is that it is far from being alone in old tech wrecks in the fiber optic and communications equipment sector, and it doesn’t really look like the situation is heading far south again.

JDSU still has a $3 Billion market cap, far short of its prior glory days during the tech bubble.  At $13.60 this is at the lower-end of its $12.41 to $17.99 52-week trading band, but on a split-adjusted basis this had climbed back to above $30 in mid-2006.  We aren’t even going to address that old huge $90 Billion or however much it was (biggest in history).

Late in 2006 it tried the 1-for-8 reverse stock split game to prop adismally low share price and that just didn’t work.  To make mattersworse, the stock’s average daily volume has been coming down steadilyand now it trades usually under 4 million shares.  Despite the FTTH(fiber to the home) initiatives from telecoms it just hasn’t grownenough. Even earlier this year when it "raised guidance" it hasn’t beenable to last.  The company has cut costs and conducted lay-offs in arestructuring and it just hasn’t helped the stock.  Even after a recentsmall acquisition it still has close $1 Billion in cash andequivalents, almost enough to cover every last penny on its $1.2+Billion liabilities (and more than enough if throw in inventory andreceivables).  So it has some wiggle room on its books.

Over the last week or so JDSU announced it was buying American BankNote Holographics for $138 million to get further into the origination,production and marketing of holograms for security applications and theleading supplier of optical security devices for the transaction cardmarket.  ABNH currently supplies and supports card manufacturers withsecurity and decorative products that are featured on cards issued byover 20,000 financial institutions worldwide.  Will this make adifference to JDSU?  It’s too soon to know, despite the billion ofdollars that JDSU claims the market will grow to.  Even if JDSU can gomake smaller high growth deals it just isn’t known if they cancumulatively add up to a major win.

ABNH had had mostly flat revenues around $32 million per year, so it’sfar short of the June-2007 fiscal sales of $1.396 Billion from JDSU.The pre-acquisition growth for JDSU revenues is expected to be $1.54Billion for fiscal June-2008 (with $0.46 EPS target) and about $1.7Billion in fiscal June-2009 (with $0.71 EPS target).  The problem hereis that even if JDSU meets or exceeds these growth projections over thenext 18 months is that it isn’t a high growth stock and it isn’t avalue stock. 

It’s still just an old out of favor fallen angel that has someshareholders still hoping the glory days will return. Investors oftoday are obviously not looking at any major growth engine. It has goneso far out of trading radars now that traders may ask "JDS Who?" whenthey are told about it.  Maybe they should ask Mr. Strauss for his oldberet back.  Analysts have an average price target around $18.00, butwhile that is a 30% gain from here it still is not anything resemblinga major turnaround.  The truth is that we still don’t know how this"turnaround will turn out," but it doesn’t look like many others doeither.

Jon C. Ogg
December 20, 2007

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