Turnarounds That Haven't Turned Around: JDS Uniphase (JDSU)

There are many companies that have been troubled and involved in turnarounds for quite some time that just never quite seem to get turned around.  Enter JDS Uniphase (NASDAQ: JDSU).  JDS Uniphase is in a true conundrum if you look into the time machine because it isn't a dirt cheap value stock and it isn't a high-growth engine. It's now just an old fiber optics company trying to find its groove.  The good side (or less bad) is that it is far from being alone in old tech wrecks in the fiber optic and communications equipment sector, and it doesn't really look like the situation is heading far south again.

JDSU still has a $3 Billion market cap, far short of its prior glory days during the tech bubble.  At $13.60 this is at the lower-end of its $12.41 to $17.99 52-week trading band, but on a split-adjusted basis this had climbed back to above $30 in mid-2006.  We aren't even going to address that old huge $90 Billion or however much it was (biggest in history).

Late in 2006 it tried the 1-for-8 reverse stock split game to prop a dismally low share price and that just didn't work.  To make matters worse, the stock's average daily volume has been coming down steadily and now it trades usually under 4 million shares.  Despite the FTTH (fiber to the home) initiatives from telecoms it just hasn't grown enough. Even earlier this year when it "raised guidance" it hasn't been able to last.  The company has cut costs and conducted lay-offs in a restructuring and it just hasn't helped the stock.  Even after a recent small acquisition it still has close $1 Billion in cash and equivalents, almost enough to cover every last penny on its $1.2+ Billion liabilities (and more than enough if throw in inventory and receivables).  So it has some wiggle room on its books.

Over the last week or so JDSU announced it was buying American Bank Note Holographics for $138 million to get further into the origination, production and marketing of holograms for security applications and the leading supplier of optical security devices for the transaction card market.  ABNH currently supplies and supports card manufacturers with security and decorative products that are featured on cards issued by over 20,000 financial institutions worldwide.  Will this make a difference to JDSU?  It's too soon to know, despite the billion of dollars that JDSU claims the market will grow to.  Even if JDSU can go make smaller high growth deals it just isn't known if they can cumulatively add up to a major win.

ABNH had had mostly flat revenues around $32 million per year, so it's far short of the June-2007 fiscal sales of $1.396 Billion from JDSU. The pre-acquisition growth for JDSU revenues is expected to be $1.54 Billion for fiscal June-2008 (with $0.46 EPS target) and about $1.7 Billion in fiscal June-2009 (with $0.71 EPS target).  The problem here is that even if JDSU meets or exceeds these growth projections over the next 18 months is that it isn't a high growth stock and it isn't a value stock. 

It's still just an old out of favor fallen angel that has some shareholders still hoping the glory days will return. Investors of today are obviously not looking at any major growth engine. It has gone so far out of trading radars now that traders may ask "JDS Who?" when they are told about it.  Maybe they should ask Mr. Strauss for his old beret back.  Analysts have an average price target around $18.00, but while that is a 30% gain from here it still is not anything resembling a major turnaround.  The truth is that we still don't know how this "turnaround will turn out," but it doesn't look like many others do either.

Jon C. Ogg
December 20, 2007

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