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JDS Uniphase Reverts to Neutral

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We upgrade our recommendation on JDS Uniphase Corp. to Neutral based on its current valuation. Recent trends in the global optical component industry indicate a glut of inventory on the part of the telecom carriers. The North American and European markets are yet to completely recover from the recession. Meanwhile, several industry players indicated that China may not be able to fully compensate the loss of the developed markets.

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. Further, JDS Uniphase is facing growing competitive threat. Nevertheless, we believe these negatives are already reflected in the current valuation since the stock price plummeted nearly 51% in the last five months. This low-level of valuation may provide a cushion for further downslide.

Emerging 4G Long-Term Evolution (LTE) networks became another major growth driver for JDS Uniphase. At the end of 2010, there were 22 commercially operational LTE networks throughout the world and this number is expected to reach at least 64 by end-2012. For LTE projects, the company is currently working with 30 customers on protocol test, 25 customers on drive test, and 10 customers for service assurance. A major European telecom carrier has selected JDS Uniphase to provide test solutions for the deployment of the carrier’s super-fast LTE and 100 Gbps networks.

Acquisition of Network Solutions Division (NSD) of Agilent Technologies Inc. (A - Free Report) increased JDS Unipahse’s addressable market size to $800 million. NSD expanded end-to-end wireless network test solutions portfolio of the company. Furthermore, JDS Uniphase entered into a partnership with Amada to develop a high-power 4 kilowatt fiber laser. Industry sources estimated that kilowatt materials processing market size may exceed $1 billion by 2013.

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