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We downgrade our recommendation on JDS Uniphase (JDSU) to Underperform. Recent trends in the optical component industry indicate a glut of inventory on the part of the telecom carriers. The North American and European markets have yet to completely recover from the recession.

In the meantime, several industry players indicated that China may not be able to compensate the loss of the developed markets fully. Moreover, the devastating earthquake and tsunami in Japan will reduce demand and may disrupt the supply chain. We believe the weak industry demand may continue for a couple of quarters.

Excluding these broad-based macro scenarios, JDS Uniphase is facing growing competition in those sub-segments of the optical network industry, which had been exclusive to the company. Meanwhile, the stock price of JDS Uniphase surged more than 86% last year.

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