Why Holding On to This Stock Is a Good Idea

Why Holding On to This Stock Is a Good Idea

JDS Uniphase year has been unremarkable so far. The manufacturer of fiber optics components has remained flat this year while the broader market has advanced significantly. And after taking a look at the company's recently released fourth-quarter results, it isn't clear if there's a turnaround in sight.

Missing revenue estimates and offering light guidance aren't good signs, especially when peer Finisar issued terrific preliminary results earlier this month. Uniphase saw revenue decline 3% from last year to $421 million in the quarter, behind the $431 million consensus, while earnings came in line with estimates at $0.13 a share. This mixed performance wasn't helped by a weak guidance for revenue between $410 million and $430 million, behind the $434 million Street estimate.

Management stated that it witnessed strength in bookings in the quarter across all of its segments, with the book-to-bill ratio exceeding one. However, Uniphase opted to tread a cautious path citing uncertainty in the Chinese and the EMEA markets. So, if the guidance was indeed cautious, then investors should consider giving Uniphase a benefit of doubt.

However, the two primary businesses of the company look differently positioned when compared to each other. The communications test and measurement segment, accounting for 45% of revenue, has been a pillar of strength for Uniphase, but the optical products business, which contributes 43% to the top line, hasn't been in high gear.

Losing share?
As a few analysts suggest, Uniphase might be losing market share in optical components, and optical networker Finisar's robust pre-announcement also suggests the same. Finisar is expecting revenue of $266 million for the previous quarter, ahead of both the consensus estimate and the upper end of its own guidance.

It seems like Finisar's product development moves are bearing fruit. On the previous conference call, management had stated that Finisar's cost-effective 100G module was finding traction in the market. Moreover, the company had stated that it expects better telecom spending in the latter half of the year and its preliminary results indicate the same. So, the fact that Uniphase cannot benefit from this uptick in telco spending is concerning.

Looking closely
Uniphase's telecom revenue came in weaker than expected in the previous quarter. But, management is of the opinion that the weakness was primarily a result of a drop off in sales of its legacy products, and this is yet another reason why one can give Uniphase the benefit of doubt, especially considering the improvement in sales of new products.

Out of the total revenue generated by CommTest and optical communications, 65% was from products that were less than a couple of years old. Uniphase's new products have been winning contracts. This was evident in the five customer wins for its location intelligence services in the previous quarter and another five new customers for its PacketPortal solution, which has been witnessing solid adoption of late.

The company's innovation in its optical business is also worth noting, where it received its biggest order in the previous quarter and has also started shipping its 100G CFP2 module on a trial basis. However, Uniphase will see competition from Finisar for this module as even Finisar will begin ramping up production this year.

The TD-LTE opportunity
Another driver for Uniphase would be the roll out of TD-LTE in China. The company is indeed witnessing activity in build out of the TD-LTE infrastructure, although it hasn't seen many orders yet. However, Uniphase's relationship with vendors such as Huawei in China can come in handy and help the company benefit from the likes of China Mobile , which is aggressively moving to deploy China's first LTE network.

A couple of months back, China Mobile had issued an LTE tender for 207,000 base stations, and this was its largest ever tender, according toChina Daily. The newspaper also pointed out that the telecom giant will also boost its capital spending by close to 50% this year to $30.5 billion and a substantial portion (around 50%) will be spent on the TD-LTE roll out. And considering that Chinese vendors such as Huawei are expected to be preferred choices for the equipment, Uniphase might see more revenue come in from the Middle Kingdom.

Final words
After a closer look, it makes sense to hold on to Uniphase. The company's new products have been selling well but it's the decline in sales of its legacy products that has probably led to weaker performance in telecom. Also, management has exercised caution while issuing the outlook, which might be a good thing if Uniphase trumps its own estimates next time.

The opportunity in optical components and communications test equipment is substantial as telecom players around the world (especially the U.S. and China) roll out LTE and more datacenters are built. If Uniphase's new products are indeed finding traction, then the company might see its top line grow once again.

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The article Why Holding On to This Stock Is a Good Idea originally appeared on Fool.com.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published