Why Analysts Like the JDS Uniphase (JDSU) Spin Off

This story has been updated from 8:06 am EST with stock price update and analysts comments.

NEW YORK (TheStreet) -- Shares of JDS Uniphase  (JDSU) surged 11% to $13.45 , after the company disclosed in a filing Wednesday that it plans to separate into two publicly traded companies, and following pressure by hedge fund Sandell Asset Management to split up, sources told Bloomberg.

The company said it create a separate company from its optical components and commercial lasers manufacturing unit, and another selling network-testing equipment. JDS Uniphase has a market capitalization of $2.78 billion.

More than 23 million shares of JDS Uniphase had changed hands on Thursday -- more than five times its three-month daily average trading volume.

Sandell, which has built up a stake of about 2% in JDS Uniphase, had been pushing the company in recent months to split up, sources said. The optical equipment business may attract buyers such as Avago Technologies (AVGO) or Finisar Corp (FNSR) , sources added, according to Bloomberg.

RBC Capital upgraded JDS Uniphase to "outperform" from "sector perform" and raised its price target by $7 to $18.

"It's an important step for JDSU and a significant new start for an industry defined by high innovation, but low price premiums. Splitting the business in two creates more attractive assets following different innovation paths with different end-customer applications. With early steps in place to unlock value, we're upgrading the stock," RBC Capital analyst Mark Sue writes in a note, who sees long-term potential for the stock to rise to $40.

 
Here's what other analysts are saying about the spin off on Thursday.

James Kisner, Jefferies (Hold; $13 PT)

We like the split; the natural next question is who "gets the kids" -- i.e., buys the Optical or NSE/OSP businesses. We're not inclined to chase the stock here as the best reasons to own it -- cost cuts and potential additional transactions down the road -- have execution risk or won't happen till after the spin. Further, JDSU's end markets remain pressured.

Michael Genovese, MKM Partners (Buy; $15 PT)

Announcement gives us increased confidence in our Buy rating and $15 price target. We have a positive view of JDSU's announcement that it will separate into two publicly traded companies. There are few synergies between Test and Measurement and Optical components, and grouping them together muddles the investment case for each. The separation likely lays the stage for further industry consolidation on both sides of the business, and consolidation is sorely needed in Optical components. We are reiterating our Buy rating and 12-month price target of $15. Previously, our price target was based on an earnings multiple of an estimate we were worried about. Our $15 price target is now based on a fairly conservative sum-of-the-parts analysis, and we think the stock could overshoot this valuation in the near term as investors consider the potential benefits of industry consolidation.

Kent Schofield, Goldman Sachs (Neutral; $14 PT)

We remain Neutral rated on JDSU shares given a combination of a (1) challenging 2H14 US tier 1 carrier capex outlook and 2) ongoing M&A related transitions resulting in muted NSE top and bottom line growth C1H14. There is no change to our estimates.

TheStreet Ratings team rates JDS UNIPHASE CORP as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate JDS UNIPHASE CORP (JDSU) a HOLD. The primary factors that have impacted our rating are mixed some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and a generally disappointing performance in the stock itself."

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