Electro Optical Engineering (Nasdaq: EXFO) should benefit from increased bandwidth demand

• BUY EXFO near $7.06

Electro Optical Engineering provides test and measurement equipment for telecommunication carriers and cable operators to test and monitor fiber optic networks.

Electro Optical Engineering has a market cap of about $483 million, $115 million in cash and no significant long term debt. The trailing P/E is about 38.

Electro Optical reported third quarter 2007 earnings a few days ago. Sales came in at $39.2 million and GAAP net earnings totaled $2.6 million or $0.04 per share. Sales increased 10.7% year over year and 11.4% sequentially from the second quarter. Gross margins were 57.1% compared to 56.4% in the third quarter of 2006 and 57.5% in the second quarter of 2007.

Demand in the optical test and measurement sector remains strong as seen by Electro Optical’s raised forward guidance. The company said it expects “significant growth in the fourth quarter” and raised guidance by about $5 million by forecasting fourth quarter revenues between $41 and $44 million.

Shares of Ciena (Nasdaq: CIEN) have been on tear lately as Ciena has raised guidance and beat estimates for two straight quarters. Back in early March Wall Street Mayhem commented that shares of Ciena appeared to be undervalued after the company reported a strong quarter, but the stock dropped. Since then Ciena has turned in another great quarter and this time the street took notice. More importantly, Ciena’s strong results show that demand for the optical sector as a whole is continuing to grow.

JDSU Uniphase (Nasdaq: JDSU) has reported mixed results lately. However, JDSU has shown strong demand and growth in optical test and measurement equipment. Strength in test and measurement at JDSU is a good sign for Electro Optical because Electro Optical derives nearly 80% of total company revenues from the optical test and measurement division.

Demand for increased bandwidth is showing no signs of slowing down. Bandwidth intensive applications using video continue to gain consumer adoption. A recent article in the Financial Times suggests that Apple (Nasdaq: AAPL) will soon begin renting movies online. Although Apple already sells movies online, the addition of low cost movie rental downloads could have a major effect on the movie rental industry. If downloadable movie rentals from Apple take off like Itunes did, bandwidth usage and demand will skyrocket.

In addition to movie downloads, video applications such as Internet TV should also create a surge in bandwidth demand. The research firm iSuppli recently released a report predicting Internet TV revenues to grow 14 fold by 2011. The report went on to say that bandwidth required for Internet TV will grow by more than 44 times to about seven Tebibytes (TiBs) by 2011.

It seems clear that demand for increased bandwidth will continue to grow for the foreseeable future and shares of Electro Optical Engineering represent a great way to profit from the macro trend in bandwidth demand.

Full disclosure: Wall Street Mayhem is long EXFO 

Taking profits in Cree (Nasdaq: CREE) and Nexxus (Nasdaq: NEXS)

• SELL ½ position NEXS near $6.28

• SELL remaining ½ position CREE near $26.05

The LED sector has had a tremendous run over the last month. Considering the recent market volatility we think this is good time to take some profits in this sector. This trade closes out our position in CREE and reduces NEXS to a half weight position. We will continue to follow CREE and will likely be buyers on any significant pullback.

Growth at Jamba Inc. (Nasdaq: JMBA) should juice up revenues and profits

• BUY JMBA near $10.02

Jamba, Inc. operates a chain of smoothie shops focusing on fresh fruit smoothies with optional vitamin and protein supplements. Operating under the Jamba Juice brand name, Jamba has about 600 locations including full size stores and on-site kiosks. Jamba differentiates itself from other beverage and fast food outlets by focusing on fresh and healthy drinks and food products.

Jamba, Inc. has a market cap of about $530 million, cash of about $67 million and no significant long term debt.

On June 11^th Jamba announced earnings for the first quarter of 2007 of $11.9 million or 20 cents per share versus a year ago loss of $81.5 million or -$3.88 per share. Although these first quarter results included a pre-tax gain of $15.2 million, after backing out this gain the results still handily beat analyst expectations. Revenues increased 22% year over year coming in at $89.4 million.

Jamba opened 26 new stores in the first quarter of 2007. Although Jamba is already expanding at a brisk pace, the long term goal for Jamba is to open over 5,000 stores worldwide. Jamba says that this number can be reached without cannibalizing existing stores by expanding to new areas with residential density of 15,000+ within one mile, average household incomes over $50,000, and strong vehicular and pedestrian traffic counts. Fueled by these expansion plans and increasing same store sales, Jamba is forecasting revenues of at least $600 million a year by 2010.

We think that yesterday’s weak market conditions helped create a rather subdued movement in shares of Jamba after the company reported excellent results for the first quarter. At this point, shares of Jamba are only about 0.5% higher than they were before the first quarter results were announced even though Jamba beat top line expectations by 30% and it appears that Jamba’s growth is accelerating faster than expected.

Currently, 42% of Jamba’s revenues come from “light” users. These light users visit Jamba Juice stores 1 or 2 times a month. If Jamba can entice these light users to visit Jamba Juice 1 more time per month, total company revenues would rise by 10%.

In order to increase the frequency of customer visits, Jamba is implementing various new initiatives designed to compliment Jamba’s core competency of healthy, fun, and on-the-go product offerings. A healthy version of a stuffed pocket breakfast product will be offered at select locations starting this summer. A ready to drink bottled product is also in development and should be ready in the second half of 2007.

One of the Jamba Juice stores located in the Bahamas recently started selling salads and other pre-packaged healthy food options. Jamba has reported that sales at this location have been brisk and that the additional food offerings have helped increase customer retention rates and customer visit frequency. Jamba is currently evaluating options for including similar healthy food options in at many Jamba Juice locations.

On the marketing front, Jamba recently partnered with Nike to promote Jamba Juice at marathons and other sporting events. This cross promotion with Nike is typical of Jamba Juice marketing which tends to shun traditional media outlets in favor of grass roots campaigns and viral marketing opportunities.

Jamba hopes to become the world’s leading brand focusing on what the company calls “healthy energy”. The core of the healthy energy concept revolves around fresh fruit high in antioxidants, vitamins, minerals, natural sugars, and fiber. Consumers in the US are increasingly health conscious and although fast food chains have attempted to increase healthy food options, Jamba Juice is well positioned to become the market leader for healthy drinks, snacks, and light meals. Jamba does not have to reposition itself to appeal to the health conscious consumer, healthy drinks and food are part of the core concept of the Jamba Juice brand.

Recently companies like Chipotle (NYSE: CMG) and Buffalo Wild Wings (Nasdaq: BWLD) have seen their stock prices soar due to increasing revenues and profits largely fueled by aggressive expansion plans. Jamba Inc. could be poised to follow in the footsteps of these companies. Revenues jumped in the first quarter of 2007 and analysts expect Jamba to become profitable (without one time gains) in the seasonally strong second quarter.

At Wall Street Mayhem we think that the risk/reward ratio for shares of Jamba is excellent at this point. Jamba’s growth should continue to accelerate due to expansion and recent initiatives designed to drive customer frequency rates. Additionally, over 30% of Jamba shares are held short. As seen by the recent moves in Wall Street Mayhem picks Cree (Nasdaq: CREE) and Taser (Nasdaq: TASR), high short percentages can create quick surges in share price when companies receive positive news or increased investor attention.

Jamba is poised to report an excellent 2^nd quarter for 2007. Revenues exploded in the first quarter and traditionally the 2^nd quarter is much stronger for Jamba Juice due to favorable weather conditions. Now is a good time to buy shares of Jamba Juice before the second quarter results and before the short covering starts to accelerate.

The board of directors and the management at Jamba Juice have made quality strategic decisions and they have an exceptional pedigree. Although Jamba is a small company from a market cap perspective, management has extensive experience in food and beverage retail. CEO Paul Clayton is the former President of Burger King (NYSE: BKC) North America while Board member Craig Foley was the early lead investor in Starbucks (Nasdaq: SBUX) and Costco (Nasdaq: COST) and was on the board of directors at Starbucks for 15 years. Other Jamba board members also serve on the boards of Ebay (Nasdaq: EBAY), Burger King (NYSE: BKC), and P.F. Chang’s (Nasdaq: PFCB).

Jamba Inc. is a growth story in its early stages. Although Jamba must increase customer frequency rates to become a highly profitable company, recent initiatives including pre-packed bottled beverages and healthy food products should open Jamba Juice to a wider range of customers while increasing visit frequency for current customers.

With a market cap of only $530 million, rapid growth, and a healthy brand image, Jamba has the makings of an appealing takeover target. If Starbucks wanted to extend their dominance of the beverage industry while improving their appeal to health conscious consumers, Jamba seems like an excellent fit.

Full disclosure: Wall Street Mayhem is long  JMBA

Update on Cree Inc (Nasdaq: CREE)

• SELL ½ position in CREE near $25.75

Although all of the long term trends are still intact for Cree, the recent run-up has been so strong in such a short period of time that we feel compelled to lock in some profits at this point. New legislation banning incandescent bulbs continues to gain strength. Therefore, we are holding on to a half position in Cree, but with a 35% gain in less than three weeks we think it is prudent to lock in profits at this point.

Update on Dell Inc. (Nasdaq: Dell)

• SELL DELL near $28.15

Dell passed our price target of $28 this morning so we sold our shares. As we hypothesized, Michael Dell has made the changes necessary to revitalize the stock, the most important of these changes being the 10% reduction in workforce announced yesterday. Although Dell appears to be back on track, at current prices Dell shares no longer have the compelling valuation that they did a few months ago.