We downgrade our recommendation for JDS Uniphase Corp. (JDSU) to Neutral on the basis of the current valuation, just ahead of its first quarter of fiscal 2011 financial results. The optical component industry is cyclical in nature and is characterized by price volatility. JDS Uniphase itself declared that the company will suffer 15% decline in average selling price (ASP) in 2010. A weaker-than-expected market recovery may make the situation worse.
Nevertheless, we remain optimistic about the success of the company’s product portfolio targeting next-generation technologies of IPTV, wireless backhaul, LTE networks, and 40 Gbps and 100 Gbps optical network systems. Management is performing well on cost control and cash preservation. This helps the company to significantly improve its gross and EBITDA margins. An improving global economy will also help the company to sustain growth.
As a leading supplier of fiber optic components and modules used in advanced high-speed communications networks, JDS Uniphase is benefiting from rapidly growing Internet traffic and associated applications. During the fourth quarter of fiscal 2010, all the three segments had greater than 1.0 book-to-bill ratio, indicating strong order bookings. This is the fifth consecutive quarter that JDS Uniphase has achieved an overall book-to-bill ratio of greater than 1.0.
We believe the Communications and Test Measurement division of JDS Unipahse will immensely benefit from the massive growth of wireless backhaul and DOCSIS 3.0 networks. While wireless carriers are gradually increasing their backhaul capacity due to the significant growth of mobile Internet traffic and multimedia applications, the cable operators are quickly deploying DOCSIS 3.0 networks in order to remain competitive by providing faster data access speeds.
Meanwhile, the stock price of JDS Uniphase has moved up more than 116% during the last one year and is currently at the high end of its 52-week price range. With respect to several valuation metrics, the stock is also trading at significantly high multiples with respect to the S&P 500 average. According to our view, the current high valuation of JDS Uniphase offers little scope for any above-market gain.
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