Optical Illusion: JDS Punctures Analysts' Faith in Second-Half Recovery - TheStreet

Optical Illusion: JDS Punctures Analysts' Faith in Second-Half Recovery

Several analysts finally give up the ghost and downgrade. The stock and the sector are hurting today.
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Whatever anyone believes about a second-half recovery, analysts think that

JDS Uniphase

(JDSU)

won't be taking part.

In January,

Credit Suisse First Boston's

James Parmalee thought the optical-gear industry would grow 50% in 2001 after doubling in 2000. This optimism remained intact during the February downturn even as

Lucent

(LU)

and

Nortel

(NT)

warned. The possibility for a second-half recovery was the oft-chanted mantra of the bulls at this point, with an overwhelming majority of analysts like Parmalee telling investors to buy JDS Uniphase because of its position as a leader in the space.

Today, after JDS threw water on waning recovery hopes with another earnings warning, Parmalee cut the company to hold from buy. At least four other brokerages have dropped their ratings, too.

SG Cowen's

John Butler and

Wachovia Securities'

George Hunt cut the company to neutral from buy, while

ABN Amro's

Jung Ho Park dropped it to hold from add.

Deutsche Banc Alex. Brown

analyst Raj Srikanth dropped it to market perform from buy.

While the moves once again come after the horse has left the proverbial barn, they represent a final nail in the proverbial coffin regarding hopes of a second-half turnaround for JDS and its optical brethren. The sector is hurting today: JDS is off 12% to $12.17, while the

Amex Networking Index

is off 4.5%.

Meanwhile, Nortel's

earnings warning has added to the downward pressure. That stock is off 12% to $9.35.

As of last Friday, JDS Uniphase was still a Wall Street darling, with more than 24 of the 34 ratings given to it ranked at some kind of a buy, according to

Morningstar

. But after warning about the next two quarters last night, analysts have switched gears, highlighting not only technology's torpor, but also the research community's divide over rating based on long-term prospects or near-term destruction.

Informally, only 19 companies have some kind of a buy rating, while 15 others have the lowly hold rating -- Wall Street's informal nod to sell.

Two weeks ago, Shayna Malnak, a research analyst with

Williams Capital Group

, downgraded JDS to hold from buy after a West Coast visit with

Agilent

(A) - Get Report

. After meeting with the telecom-gear maker, she felt that a recovery in the telecommunications business might not happen until after the third quarter at the earliest. And with the second-half recovery story now dead in her mind, Malnak stopped believing -- although she, like many of her peers, still thinks that JDS's fortunes are bright in the long term.

"Things were coming around to the point in which you were then looking into 2002 for good news. It made it difficult to defend the stock because there's no telling what will happen between now and 2002," she said. "How could I set any kind of price target if you don't trust your own numbers?"

Analysts usually site a myriad of reasons for liking JDS -- its fairly diverse offering of optical products, great cash position and strong leadership role in the industry. As this year's bad news increased and the stock price fell 90% from a 52-week-high, analysts found good news for investors. Many advised investors to get in at the lower multiples to participate in the second-half economic recovery.

In Alex. Brown's note this morning, Srikanth told investors that a recovery might not come until 2003 -- more than 12 months from now. ABN Amro's Park was a little kinder, talking up a modest recovery in the first quarter of 2002. One thing is clear, the second-half recovery story for technology has died, and with its passing, so have some of the high ratings for JDS Uniphase.

Is this weakness, as

Goldman Sachs'

Natarajan Subrahmanyan said in a note this morning, priced into the stock? Should investors, as

W.R. Hambrecht's

Jim Liang wrote to clients, snap up stock now to participate in the tentative 2002 recovery -- still seven months away?

"There is real long-term value," Malnak said. "For myself, I'd like to see where it falls to. Nobody really knows what the longer-term growth rate is from this point on. But I don't think anyone wants to stick their neck out and say it's over. It's a very tough call."

JDS Uniphase touched a 27-month low of $10.81 earlier in the day, turning the clock back to March 1999. At Thursday's close, the stock sported a forward

price-to-earnings ratio of 25.