Start Selling JDS Uniphase

JDS Uniphase Corporation (NasdaqGS: JDSU)                                 11/13/2012 Last Price: $10.95

VIEW:  START SELL

JDS Uniphase is focused on optical technologies. The firm’s optical component business provides modules, subsystems, and transceivers used in networking equipment. The firm also derives a substantial portion of revenue from test and measurement products used in the communications industry. While JDS has diversified its customer base, the bulk of its business is still tied to spending patterns of telecom carriers.

Sector: Technology                                                          Industry: Communication Equipment

Highlights:

JDS Uniphase Corporation provides communications test and measurement solutions, and optical products for telecommunications service providers, wireless operators, cable. The stock closed yesterday’s trading session at $10.95. In the past year, the stock has hit a 52-week low of $8.47 and 52-week high of $15.17. Technical indicators for the stock are neutral for the short term, the company trades at very demanding price level.

GROWTH AND BALANCE SHEET

JDS Uniphase Corp. reported mixed financial results for the first quarter of fiscal 2013. Quarterly net revenue was $420.9 million, up 1.2% year over year. JDS Uniphase met expectations on revenues and beat expectations on earnings per share. At the end of the first quarter of fiscal 2013, JDS Uniphase had $698.8 million of cash & marketable securities and $249.9 million of outstanding debt on its balance sheet compared with $722.5 million of cash & marketable securities and $445.5 million of outstanding debt on its balance sheet at the end of fiscal 2012. For the second quarter of fiscal 2013, management expects the company’s non-GAAP revenue to be within the range of $410 – $430 million. The total Debt/Equity of 23.90% is acceptable for an industry with average 27%.

VALUATION

JDSU is a major player in the optical components, network test and measurement, and anti-counterfeiting solutions markets. The company’s newly launched products accounted for 58% of its total revenue in core network market. JDSU has a PEG ratio of 1.81 above the industry average. Current PE at JDS Uniphase stands at 19, way higher than most of its peers in the industry. The stock is currently trading below its intrinsic value of $27. The beta of 2.9 implies very high volatility of the stock with respect to the S&P 500. We expect the company is going to have continued struggles with sales because businesses are just very cautious to spend more than they need to right now.

RECOMMENDATION for next 6 months: We initiate our coverage with START SELL. The company has demonstrated a pattern of neutral technical signs, but the valuation now isn’t very attractive and the outlook for the company is mixed.

Shares are up 6.99% year to date as of the close of trading yesterday. Our overall score for JDSU is 4.17

For options trading we suggest:

• Buy the January 2013 put with a strike of 10 priced at $0.42 per contract
• Sell the January 2013  put with a strike of  9 priced at $0.21 per contract
• Net Debit to start: $0.21
• Maximum risk: Net debit

NEWS and CALENDAR

Thursday November 8, 2012 – Form 10-Q for JDS UNIPHASE CORP /CA/

Wednesday November 7, 2012 – Ciena, JDSU, Juniper shares boosted by AT&T plan

Tuesday November 6, 2012 – JDSU to Present at 2012 Credit Suisse Annual Technology Conference

JDSU Strengths

• Net cash on its books
• Innovative Culture
• AT&T confirmed its capital budget plan
• Research and Development

JDSU Weakness

• Cisco enters the market
• Consolidation trend
• Volatile Business
• Global growth concerns

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

JDSU’s intrinsic value is $12.00 the current price is $10.95, the stock trades 10% below its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

We are searching for EPS numbers that are better than the previous year’s. One dip is allowed, but the following year’s earnings should be higher than the previous year. JDSU’s annual EPS for the last 5 years were -0.18, -4.20, -0.27, 0.31, -0.24 this type of earnings action is not favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

JDSU’s Total Debt/Equity of 23.90% is acceptable as the industry average debt/equity is 27.40%

EPS This Quarter VS Same Quarter Last Year

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

JDSU’s EPS growth for this quarter relative to the same quarter a year earlier is -100.00% well below our target.

Annual Earnings Growth

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%.

JDSU annual earnings growth rate over the past five years is negative.

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

JDSU’s 52 week high is $15.17 current price is $11.16, is 34% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a forward P/E ratio of 13.13 (but negative historic P/E) below the average industry P/E ratio of 14.00 and is also below the S&P 500 P/E ratio of 16.30

Insider Ownership

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 0.18% of JDSU stock. Management’s representation is not large enough. This does not satisfy the minimum requirement; companies that pass this test are more attractive to our valuation model.

Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

JDS Uniphase stock has been showing support around $9.70 and resistance in the $12.80 range. Our indicators give a neutral view on JDSU.