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Is This Fiber-Optic Company A Good Bet For Your Portfolio?

July 10, 2014 | About:
Vijay Mehta

Vijay Mehta

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Communication testing and networking equipment Company JDS Uniphase (JDSU) is a perfect example of inconsistency. It exited 2013 on a negative note, but started the New Year on a high and when all seemed to be going well for the company, then came in the disappointing third quarter results that missed the Wall Street Estimates.

Earlier this year, it looked like Uniphase is all set to benefit from the roll-out of TD-LTE in China by China Mobile (CHL), along with growth in gesture recognition solutions. The company said that it was seeing strong demand for fiber-optics components and testing equipment back in January but that changed in the month of April and was visible in the quarterly results.

This slowdown is an aberration

Uniphase attributed its weak performance to a delay in orders and carrier spending budgets. Orders came in later-than-expected and this hurt the company's performance in the third quarter, and forced it to issue a shallow outlook.

In fact, Uniphase has guided for revenue between $425 million to $445 million for the fourth quarter, significantly behind the $459 million Wall Street estimate. Its earnings forecast left a lot to be desired as well. The company expects earnings in the range of $0.10 to $0.14 per share, but consensus estimates called for $0.17.

Losing market share to Finisar?

It might be possible that Uniphase is losing market share to Finisar (FNSR), and it won't be the first time if this is indeed the case. Finisar seems to be riding positive trends in the telecom and data communications industry with confidence. The company had issued a robust outlook the last time it reported earnings.

This doesn't come as a surprise since Finisar is on track to benefit from network upgrades by several telecom players, both in the U.S. and abroad. In addition, it might be in a better position to profit from the roll out of fiber services by the likes of AT&T and Google as compared to Uniphase. According to Raymond James and Associates, Finisar has the highest exposure to optical-network spending among peers, counting customers such as Ciena,Cisco, and Huawei.

Giving the company another chance?

Uniphase bulls might consider giving a small benefit of doubt to the company. Management says that the company was a victim of amplified seasonality factors and that things should improve going forward. Uniphase saw lower orders from a couple of customers in North America, but this might be a blessing in disguise.

The company believes that the delay was due to the metro build-out. Telcos such as AT&T are planning to deploy high-speed networks across the U.S. and this could lead to better times for Uniphase going forward. In addition, the company's bookings have also improved. At the end of the third quarter, Uniphase's order book was up 7.5% from the year-ago period.

It is seeing strong demand for some of its products, such as location-intelligent software solution and 100G products. In fact, Uniphase started shipping its 100G products to China for the build-out of the LTE network. Now, this is a long-term opportunity.

China Mobile, the country's biggest telco operator, is building the world's largest LTE network, with a planned expenditure of $13.4 billion by the end of the year. The bulk of this expenditure is slated for the second half of the year, according to Barclays which opens up more opportunities for Uniphase.

Takeaway

Uniphase's last quarterly report was bad, but not without some silver linings. However, it would be wise to watch the company from the side-lines. Having similar trading multiples as Finisar, it is worthwhile to rather invest in Finisar. Investors should watch out for Uniphase’s performance in the next quarter to better judge the prospects of the company.

About the author:

Vijay Mehta
A finance executive for over two decades, I am interested in analysing value stocks.

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