www.globeandmail.com

The Globe and Mail
leaftheglobeandmail

  JDS stock cheap, but no bargain

BENJ GALLANDER and BEN STADELMANN

Saturday, September 8, 2001

School is back in full swing, the hammocks are put away for another year, and the Contra Guys are reflecting on the past summer. Most noteworthy, JDS Uniphase's reported annual loss of a mind-boggling $50 billion (U.S.). It always seems to be a struggle for Canadian firms to reach "world class" status, but Ottawa's techno-pride has blown away the field, claiming the booby prize for the largest corporate loss in global history.

Big deal, say the company's apologists, most of the loss is an accounting entry, with little bearing on current operations. The firm simply swapped its overpriced stock for the bloated stock of competitors, thereby grabbing the lead in a burgeoning technology. True enough, but this trite analysis gives the impression that the path JDS chose for itself has little to do with its stock dropping from $153 to $6.43 on the Nasdaq Stock Market.

We beg to differ. What the company did was exactly the same thing as so many profligate governments have done: it printed money to pay the bills. A friend who just returned from Russia told the story of a family that received an inheritance from an aunt who had stashed some cash in a cupboard five years before. What was once a substantial sum that would have bought a modest apartment, now buys only a few bottles of vodka.

Big deal, says the bureaucrat, it's just a bit of paper and ink — the country didn't really lose anything. There's the rub: when a government devalues a currency, it is the nation's savers who suffer. When corporations print stock certificates, causing massive dilution, it is the shareholders who are hung out to dry. Even folks who never had anything to do with JDS will lose out — meanwhile, that humongous loss will be carried forward for years, shielding the company from paying taxes should it ever become profitable. How fair is that?

Did JDS have a choice? Of course it did. For starters, the company could have had a little more faith in the ability of the research and development department to keep the company ahead of the competition. That inflated stock could have been used to buy a firm with solid assets, as upstart America Online Inc. did with its purchase of media giant Time Warner. Or the company could have sold the shares to eager investors for cash at those sky-high prices, as did bio-tech darling Celera Genomics Group, which floated a secondary offering at $225 a share last year.

Is this advice with the advantage of hindsight? Perhaps it wasn't so obvious at the time of these monster takeovers that the company would have been better off to trade its sterling reputation for cash? In the last conference call, it was a tad peculiar to hear founder Jozef Straus talk about the loss as an accounting artifact — he seems convinced that it is not real money.

But insider trading offers some conflicting information: scan the activity over the past couple of years and you will see an awful lot of selling and absolutely no buying. Certainly, the tidy $137 million Jozef pulled in in August 2000 by selling shares at about $117 a pop counts as mucho dinero.

JDS's stock is now cheap, but it's no bargain. Even at these low levels, the market capitalization is almost $9 billion. Those who figure that fibre optics must regain prominence — if not now, then in a few years — are making a huge assumption that the technology will not be leapfrogged by wireless. And for all the talk about swallowing rivals, the competition in this field remains fierce.

Finally, assuming the company does get back on track, all of those printed shares cannot be blinked out of existence with the ease of crossing goodwill off the balance sheet. Every dollar of earnings gets pulverized into 1.32 billion pieces.

Our advice is to give this one a wide berth, at least until management starts converting its mountains of hard cash back into the company's paper.


back