Cramer: Big changes should generate 25% gain

JDSU has room to run: Cramer
JDSU has room to run: Cramer   

Jim Cramer always says that investors need to watch the market like a hawk. This is why.

"Last Wednesday we got some very big news from JDS Uniphase; the company came right out and told us that they're splitting into two separate businesses," Cramer said.

The "Mad Money" host has often said that a break up typically generates shareholder value and this is no exception.

Effectively, JDSU intends to split itself into two units, Cramer explained; a test and measurement business with relatively high gross margins and an optical business, with lower margins.



Jim Cramer Mad Money
Source: CNBC

"So by spinning off the optical division, JDSU will become a much higher margin company," Cramer said, and as a result he thinks the Street will reward shareholders with a higher multiple.

"Beyond that, though, I expect both businesses to do better as standalone companies than they're currently doing as a single combined entity," Cramer added.

Cramer's crunched the numbers and he believes "if you value the optical business and the test and measurement business versus rivals, on a price to earnings multiple basis, then the sum of the parts could be worth $15.23 per share, which represents a 13 percent gain from these levels."

However, he also said, "If you get more aggressive and use the average price to sales multiples for the optical plays and the test and measurement companies, then the sum of the parts for JDSU could be worth $17.30, or a 28.5 percent gain. And that doesn't factor in any improvement in the business."

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All told, Cramer is a buyer.

"Now, JDS Uniphase expects their breakup to be completed by the third-quarter of next year, and I think you should own the stock going into the spin-off. I can see it rallying substantially until that time."

(Click for video of this Mad Money segment)

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