JDS Uniphase Remains Neutral - Analyst Blog

We maintain our long-term Neutral recommendation for JDS Uniphase Corp. (JDSU), which means the stock will perform in line with the broader market. As a leading supplier of fiber optic components and modules used in advanced high-speed communications networks, JDS Uniphase is benefiting from rapidly growing Internet traffic and associated applications. The company is accelerating its top-line growth driven by huge contribution from optical networking equipments coupled with the recent acquisition of the network solutions products of Agilent Technologies, Inc. (A).

Acquisition of the Network Solutions Division (NSD) of Agilent  hasincreased JDS Unipahse's addressable market size to $800 million. NSD has expanded the end-to-end wireless network test solutions portfolio of the company. In the first quarter of 2011, NSD contributed $30 million of revenue. Furthermore, JDS Uniphase entered into a partnership with Amada to develop a high-power 4 kilowatt fiber laser. Industry sources estimate that kilowatt materials processing market size may exceed $1 billion by 2013.

Emerging LTE network becomes another major growth driver for JDS Uniphase. The first ever super-fast next-generation (4G) LTE network has already been deployed in Europe. U.S. is likely to see a series of LTE network deployments in 2011. For LTE projects, the company is currently working with 30 customers on protocol test, 25 customers on drive test, and 9 customers for service assurance. Several industry researchers have estimated that the market size for mobile backhaul Ethernet equipment may exceed $5 billion by 2014.

Nevertheless, the market for optical networking and test measurement is emerging rapidly in terms of technological innovation and demand. JDS Uniphase's product sales depend to a large degree on the market dynamics of the metropolitan and enterprise markets as well as on the long-haul fiber component market. Many of the company's competitors have greater financial, technical and marketing capabilities which may enable them to respond more effectively to emerging technologies and changes in customer requirements.

Optical component industry is cyclical in nature and is characterized by price volatility. JDS Uniphase has declared that it will suffer a 15% decline in ASP in 2011. A weaker-than-expected market recovery may make the situation worse.

 
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