JDS Uniphase: Blast from the Past

It was almost like the good old days. Shares of telecom-equipment maker JDS Uniphase leaped 15% on November 3 after the company reported its first quarterly profit in more than five years. Benefiting from cost cutting and strong sales, particularly in its optical-communications-products division, the San Jose, Calif., company reported profits of $6.8 million, or three cents a share.

The earnings report and generally upbeat comments by management prompted at least two brokerage-firm analysts to upgrade the stock. "We think the worst is behind JDS Uniphase with much improved profitability ahead," Needham analyst John Harmon wrote in a note to clients. He upgraded the shares from "buy" to "strong buy," with a target price of $26. The stock closed November 3 at $16.58.

JDS Uniphase was one of the poster children for the excesses of the tech-stock bubble of the late 1990s. Adjusted for various splits, including an unusual 1 for 8 reverse split in mid October, the stock traded for as much as $1,227 per share in 2000. Investors valued the company at more than $100 billion, compared with about $3.5 billion today. But after generating peak earnings of $4.40 per share in the fiscal year that ended June 2001, business fell off a cliff as spending for telecommunications equipment fell into a deep slump. (Incidentally, the stock's unusual symbol, JDSUD, reflects the recent reverse split. The symbol is expected to revert to JDSU in a matter of days.)

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Annual cost savings of about $90 million were a major factor in the company's return to profitability. Over the past few years, according to Value Line, JDS has shuttered 52 sites and buildings in North America, Europe and Asia. The company has exited some businesses and outsources more of its manufacturing nowadays. Management says the cost savings will be slightly higher in the current fiscal year.

On the revenue side, the most bullish development in the September quarter report (JDS's first fiscal quarter) came from the optical-equipment division, which includes fiber-optic products. Quarterly sales of $138 million were up 37% from the same quarter a year earlier and 4% from the June quarter. But revenues of $117 million from testing and measurement gear, the other key part of JDS's business, were somewhat disappointing, despite being up 22% from the year-earlier period.

Analysts are sharply divided over where JDS's stock goes from here. Citigroup's Michael Genovese reiterated his buy recommendation and his Street high target price of $28. Genovese says the latest earnings report should go a long way in addressing FUD -- fear, uncertainty and doubt -- among investors.

Standard & Poor's raised its target price, but only by $1 a share, to $17. It reiterated a "hold," or neutral, opinion on the shares. Goldman Sachs also repeated its neutral opinion while trimming earnings estimates for the June 2008 and 2009 fiscal years and cutting its 12-month price target from $24 to $19.50. Among the risks Goldman cites are the possibility that JDS's restructuring could go awry and that continued consolidation in the phone industry could impact sales.

As for analysts as a group, they see JDS earning 22 cents a share in the current fiscal year and 49 cents in the year ending June 2008 (JDS lost 10 cents a share in the June '06 year). That means the stock sells at 75 times current-year estimates and 34 times the June '08 numbers. Those aren't low numbers. But if earnings can grow at anywhere near that pace in the coming year or two, the stock could be a winner.

Just don't expect it to hit $1,200 anytime soon.