Telecom and Tech Reminisce on the Good Ole' Days, (Part 1 of a few)
Valuations are getting very rich in the communications equipment area, reminiscent of the glory days of the tech bubble. My favorite example of of this is, no surprise, one of my favorite former high-flyers - JDS Uniphase. First of all, JDSU is net income and operating cash flow negative. All-in-all throughout this company's financial statements there is almost as much red ink as black, and in some cases more! JDSU currently trades at a forward P/e (Price to Earnings) multiple of roughly 85 (using the high end of fy 2006 estimates!), and a trailing P/e of 225. Yikes! So why is an unprofitable, non-growth trend company trading at such astronimical valuations, especially when the Communications Equipment index (yahoo! finance) trades at roughly 25 times earnings, and the larger Technology sector at a relatively reasonable multiple of only 31?
In the past six months, JDSU stock has skyrocketed roughly 168%. Yes, 168%!!!!! Talk about market myopia! Aparantly no one learned anything from the burst of the bubble back in 2001, when this stock traded as high as $140, and which has been relegated to the sub-$5 range ever since early 2002. JDSU should change its slogan to something like "JDSU: disproving efficient market theory since 1999".
Call me crazy, but I don't see the story here. Everyone and their mother has known about the major carriers' plans to build out their optical fiber networks for years, its old news, if news at all. The 'pickup' in spending by network operators, again, how long has it been talked about? The emergence of new bandwidth-intensive services, rich media, etc being deployed by providers and the cable/telecom/datacom companies will drive demand for JDSU's products, but again, this isn't news. Are we then seeing these recent gains as these new service roll-outs and network build-outs make the transition from hot air to actual progress? Perhaps, but I still maintain there is too much momentum and price run-up behind this stock for that to be the case. Is it a potential acquisition target then? Again, it could happen in the current environment of consolidation (Lucent-Alcatel come to mind), but I would be surprised to see any one step to buy a company with such heinous fundamentals, especially at these valuations. Honestly I actually winced in agony while examining JDSU's financial statements (cash flow and income), its that bad (although in fairness the balance sheet looks ok).
Shares of another optical play, Corning (NYSE: glw), have likewise jumped by about 150% over the past 12 months. But Corning is actually MAKING MONEY! Cash flow, net income, revenue all positive, as well as growth in each of those critical areas. It's a turnaround story, and while the valuation the firm has been rewarded with - trading at a multiple of about 72 - might still be a little high, continuing earnings growth should bring that number more into line.
But, back to JDSU.
In a recent report, CIBC WM has a sector overweight on JDSU (when it was trading around $3.70), but gives no 12-18 month price target. They also give the company's P/e for the next 2 years as NM (not meaningful). Hmmm...very interesting. While I'm not here to discredit any particular analyst or group thereof, this should at the very least raise a few questions as to how confident the authors of said report really are. I also view this as further proof that this is a crap shoot, so-to-speak.
However, the company has relocated most of its manufacturing to Shenzen, China or other lower cost facilities. They have also reduced headcount substantially even amidst increasing demand. These are admirable corporate actions, although a little late in coming. The benefits in margins and likely profitibility resulting from these decisions should materialize withing 12-24 months. That is of course iff JDSU can actually execute on these plans, as well as their larger restructuring efforts. And, as many of you well know, this is by no means an absolute certainty, so those benefits should be discounted accordingly.
Another issue which I would like to touch upon is the relative rash of acquisitions JDSU has made recently. According to their website, the company made four acquisitions in 2005 alone (including that of Acterna), two in 2004, and only one in 2003. Now insofar as a firm's M&A activity can be seen as a proxy for its health (the degree of which is of course questionable), JDSU seems to be moving in the right direction. I would expect these recent acquisitions to become accretive to the company's earnings within the next 12-18 months. However upon examinination of the financial statements, growth due to M&A, as well as organic growth has been supremely unimpressive thusfar, and hence I would not be jumping on that bandwagon.
While this is by no means a conclusive and all-encompassing analysis of the company's prospects, I think it points out several reasons why this company, and as I will start to discuss more and more about going forward, many other telecom equipment plays are overvalued.
As always, comments whether on here or via email, aim, etc are always appreciated.
In the past six months, JDSU stock has skyrocketed roughly 168%. Yes, 168%!!!!! Talk about market myopia! Aparantly no one learned anything from the burst of the bubble back in 2001, when this stock traded as high as $140, and which has been relegated to the sub-$5 range ever since early 2002. JDSU should change its slogan to something like "JDSU: disproving efficient market theory since 1999".
Call me crazy, but I don't see the story here. Everyone and their mother has known about the major carriers' plans to build out their optical fiber networks for years, its old news, if news at all. The 'pickup' in spending by network operators, again, how long has it been talked about? The emergence of new bandwidth-intensive services, rich media, etc being deployed by providers and the cable/telecom/datacom companies will drive demand for JDSU's products, but again, this isn't news. Are we then seeing these recent gains as these new service roll-outs and network build-outs make the transition from hot air to actual progress? Perhaps, but I still maintain there is too much momentum and price run-up behind this stock for that to be the case. Is it a potential acquisition target then? Again, it could happen in the current environment of consolidation (Lucent-Alcatel come to mind), but I would be surprised to see any one step to buy a company with such heinous fundamentals, especially at these valuations. Honestly I actually winced in agony while examining JDSU's financial statements (cash flow and income), its that bad (although in fairness the balance sheet looks ok).
Shares of another optical play, Corning (NYSE: glw), have likewise jumped by about 150% over the past 12 months. But Corning is actually MAKING MONEY! Cash flow, net income, revenue all positive, as well as growth in each of those critical areas. It's a turnaround story, and while the valuation the firm has been rewarded with - trading at a multiple of about 72 - might still be a little high, continuing earnings growth should bring that number more into line.
But, back to JDSU.
In a recent report, CIBC WM has a sector overweight on JDSU (when it was trading around $3.70), but gives no 12-18 month price target. They also give the company's P/e for the next 2 years as NM (not meaningful). Hmmm...very interesting. While I'm not here to discredit any particular analyst or group thereof, this should at the very least raise a few questions as to how confident the authors of said report really are. I also view this as further proof that this is a crap shoot, so-to-speak.
However, the company has relocated most of its manufacturing to Shenzen, China or other lower cost facilities. They have also reduced headcount substantially even amidst increasing demand. These are admirable corporate actions, although a little late in coming. The benefits in margins and likely profitibility resulting from these decisions should materialize withing 12-24 months. That is of course iff JDSU can actually execute on these plans, as well as their larger restructuring efforts. And, as many of you well know, this is by no means an absolute certainty, so those benefits should be discounted accordingly.
Another issue which I would like to touch upon is the relative rash of acquisitions JDSU has made recently. According to their website, the company made four acquisitions in 2005 alone (including that of Acterna), two in 2004, and only one in 2003. Now insofar as a firm's M&A activity can be seen as a proxy for its health (the degree of which is of course questionable), JDSU seems to be moving in the right direction. I would expect these recent acquisitions to become accretive to the company's earnings within the next 12-18 months. However upon examinination of the financial statements, growth due to M&A, as well as organic growth has been supremely unimpressive thusfar, and hence I would not be jumping on that bandwagon.
While this is by no means a conclusive and all-encompassing analysis of the company's prospects, I think it points out several reasons why this company, and as I will start to discuss more and more about going forward, many other telecom equipment plays are overvalued.
As always, comments whether on here or via email, aim, etc are always appreciated.
posted by Gordon Gekko at
4:00 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home