JDS Uniphase Cp (JDSU) — free report for Ask Matt, Dangerous Rating

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.

All the details are in our report on JDSU. For the asset write-offs and their impact on eco­nomic earn­ings see Appen­dix 3 in our report. Our Risk/Reward rat­ing is on page 1.

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.

As per Invest­ment Strat­egy 101 and How to make money pick­ing stocks, JDSU fits the pro­file of a good stock to sell.

**See Finance 101 and Eco­nomic Ver­sus Account­ing Prof­its for more details on why account­ing prof­its are not reli­able indi­ca­tors of cor­po­rate prof­itabil­ity or value creation.