Here is our free report on JDS Uniphase for Ask Matt readers.
JDS Uniphase (JDSU) gets a Dangerous Rating mainly because management’s track record for value creation is very poor. Our analysis of the Financial Footnotes reveals a major RED FLAG: the company has written off over $60bn in assets over the last twelve years. That is a big number compared to the company’s market cap of roughly $2.2bn and its net assets of about $1.3bn. Such a high level of disposal of company assets does not indicate that management is good at creating value or profits from the company’s investments. Indeed, management has written off nearly $45 for every $1.00 of net assets on the books. I call that moving the business in the “wrong” direction as management’s overriding imperative is to create future cash flows from of an asset that exceed the cost of the asset…that is how value is created. This management team, on the other hand, has been destroying the value of the assets it acquires – at an alarming rate.
Coupled with management’s poor track record for allocating capital is an expensive valuation for the stock. At $10.22, the stock price implies the company will grow revenues at 15% compounded annually for the next 20 years -according to our dynamic discounted cash flow analysis. For investors to make money by investing at $10.22, the company will have to do significantly better than that. Betting on a better financial future than what is already in the current price seems a bit risky.
See Appendix 4 to learn how we calculate NOPAT and NOPAT Margin for JDSU. See Appendix 5 for details on how JDSU’s Invested Capital is enormous due to the asset write-offs. Appendix 7 (in the Return on Invested Capital section) shows how a negative NOPAT Margin and terribly low Invested Capital Turns result in a negative ROIC (to -0.1%) and negative Economic Profit of $5.4bn while Net Income is negative $866mm – during the last fiscal year.