Finding Value As a Result of CAPEX Spending: JDS Uniphase Corp (JDSU), Alcatel Lucent SA (ALU)

It has been whispered for the last couple weeks that an increase in capital expenditures (CAPEX) for future benefits from large tech and telecom related companies would benefit telecom equipment and other optical component companies. However, markets have been slow to react as the companies set to benefit have yet to raise guidance or announce earnings. But on Thursday we got our first hint of what’s to come when JDS Uniphase Corp (NASDAQ:JDSU) and Ericsson (ADR) (NASDAQ:ERIC) announced earnings. And now, all stocks in the space are trading higher.

Ericsson and JDS Uniphase Crush Expectations

Ericsson and JDS Uniphase provided the most impressive earning reports of the day on Thursday. Both operate in spaces that had seen very little momentum over the last year as large companies have cut back on costs in the U.S. due to uncertainty. However, earnings and guidance suggest otherwise, and that maybe this is now the space to own.

JDSU Uniphase beat expectations by a significant margin on both the top and bottom line. The stock then rallied over 18%, mostly due to underperformance during the last year. More importantly than its earnings was its guidance, and individual segment performance. The company’s guidance was slightly above consensus but after disappointing and conservative guidance in recent quarters investors were pleased that it showed signs of improvement. The company saw a near flat year-over-year telecom test/measurement sales which were better than the 8.5% drop last quarter. Its optical component sales rose 12.7% and lasers rose over 20%. Overall these results bode well for the industry.

On the other hand, Ericsson showed very strong gains, with 5% growth in sales due to a 51% jump in North America. The strong North American performance was due to LTE build-outs from U.S. carriers and also stronger demand in Japan. These results continue to add to the notion that earnings for other companies scheduled to report earnings in coming weeks could be good in the mobile infrastructure space.

Where to Look Next

So which telecom/communications equipment companies might benefit most? Obviously, the first choice would have to be Finisar Corporation (NASDAQ:FNSR). The company has a very similar business model to JDS Uniphase. The stock has suffered as of late due to fears of increased competition from companies such as Intel and Cisco. It has been reported that both large companies are entering the 100G silicon photonics business, therefore with Finisar trading cheaper and demand showing a boost, it’s very possible that it could rally.