In Focus

JDS Uniphase and the Telecommunications Industry

When Nortel Networks (NT:NYSE) announced last year that sales were slightly lower than they had anticipated, the TSE300 responded with a major downturn. Suddenly, Nortel, Lucent Technologies (LU:NYSE), and any related companies were experiencing stock market meltdowns. The trouble wasn't actually that the telecommunications industry was slowing, it was that they were having difficulty in keeping up with the frantic demands. Things have mellowed out in that area since then -- for Nortel, that is.  In more recent news, JDS Uniphase (JDSU:Nasdaq), another communications equipment manufacturer, designer, and distributor, have announced they will not meet previous forecasts. Is this just a phase for JDS Uniphase, or is it a sign of an industry in trouble?

First and foremost, lets talk about the market in general. Every segment of the market is running into some trouble. Chick Karin has touched on that subject numerous times in the Weekly Wraps over the past few months. In an eggshell, we Chicks feel that with our general philosophy, which is to put your company through the Chicks Dozen and make sure it makes the Grade (and buy it and hold it), these down times too, shall pass. History has shown that the stock market is cyclical. In due time it will bounce back. So do we panic when the dreaded "R" word is being used and when our financial statements show a definite economic slowdown? No. We may hold our breath a little more, cross our fingers now and then, and avoid walking under ladders... but we won't panic.

As far as the fiber optics industry goes, it appears it may, too, be a victim of the times. In the United States there are new companies coming into the arena every day. Overseas, the telecommunications business is just taking off. So if the demand is still there, what eggs-actly is going on here? Well for one, with everyone tightening their purse strings, banks and venture capitalists are not as willing as they have been in the past to loan companies the money they need to buy new equipment. For another, making matters worse, many of the failing start-up companies end up selling their used goods to established companies, making it more difficult for JDS and the others to move their product. Some fear this practice could cause sales to continue to crawl along for another 18 months. Not too good.

Another hot topic affecting almost every segment of the market is the crazy overvaluation. We're seeing it everywhere: companies and analysts predicting incredible growth consistently over a long period of time, which is theoretically unrealistic. As one would logically expect from a company, JDS was growing at 100% annually for several years and now their growth is around 25%. Still excellent... but investors simply got greedy. So when the company couldn't meet forecasts, it was automatically assumed they were failing. The market response? Sell! Sell! Sell!

JDS Uniphase is a bit different from Lucent and Nortel in that they manufacture a wider array of products (they actually sell to Nortel, Lucent and Scientific-Atlanta, among others.) So when one segment of the company is slow, perhaps the other will be hot. They may not see the same kind of negativity surrounding them that swirled around Nortel. And they're good at keeping up with this rapidly changing industry. Sure, in their books you may see some considerable losses over the years, but you'll also see some incredible acquisitions, too. When they saw that optical demand was high, they purchased Optical Process Automation, a company based in Melbourne, Florida. This will help them to expand their automated manufacturing capabilities and reduce costly labor in assembly operations.

Last but not least, in discussing JDS Uniphase I would be remiss not to mention their CEO and Co-Chairman, Jozef Strauss. With his trademark black beret and sense of humor, he is becoming a well-known player in the telecommunications game. I say "becoming" because it wasn't that long ago that he replaced then CEO Kevin Kalkhoven, who retired for health reasons. Strauss has a way with the media, using his wit and intelligence to keep analysts from predicting the worst. Unlike Nortel, his demeanor can take the edge off of what could be a tough situation... he makes bad news seem not so bad. Ultimately, it has helped the company avoid some major pitfalls with the press.

But lately some bad press was unavoidable in the wake of the firing of some 700 employees at one point, and another 3,000 just a few weeks ago. It is an unfortunate part of the business, but again, realistic. Even though it may not be a direct result of a faltering industry, but rather a faltering economy, it still remains in their best interest to be cost-conscious. The bottom line is, at this moment in time, everyone is struggling. It's all about cause and effect, Chicks. Time to play the waiting game.

This industry is still potentially one of the biggest moneymakers out there. Who will be the hero in the end is anyone's guess. But with the US demand still there and the overseas market just branching out, it seems to be worth keeping an eye on. It's difficult but necessary to remind ourselves (sometimes daily, sometimes hourly) that things will not be down forever. It takes a lot of patience, and confidence in your choices, to get through these exasperating roller-coaster rides. There's not much any of us can do. Just stay away from black cats, will ya?