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This Telecom Equipment Maker Looks Like a Good Deal

May 29, 2014 | About:

The market is unpredictable. Sometimes it moves in a way we can’t predict. Investors of ADTRAN (NASDAQ:ADTN) saw this situation when the company’s shares rose at a rapid pace. The company posted fantastic results, which led it to new highs. But will these gains be short-lived, or will ADTRAN continue to fly after gaining more than 16% so far this year. And most importantly, should investors add more to their ADTRAN position at current levels? Let’s find out.

A Solid Quarterly Performance

ADTRAN surprised everyone and posted solid earnings. The company’s revenue rose 6% to $143 million. These results also outpaced consensus estimates. ADTRAN saw continued improvement in the business environment, driven by better spending from telcos, while geographical expansion helped revenue further.

However, it was the bottom line beat that took the stock to another level. ADTRAN posted outstanding figures on earnings. The EPS came in at $0.17 per share, which topped the Street’s estimates of $0.08 per share.

On the other hand, the company’s gross margin was hurt. The gross margin fell to 48.7% from 55% in the year-ago period, while operating income was down almost 60% from the prior year period, and non-GAAP EPS was down 25%. However, the results indicate that these crunches couldn’t stop ADTRAN from flying high. The company’s share repurchase program proved to be a growth driver.

A Closer Look

According to UBS analyst Amitabh Passi, the company bought back $22.5 million worth of shares in the previous quarter, which was three fold the $7.5 million analysts had initially expected. However, the bottom line is that the ADTRAN turned in a better-than-expected performance.

According to CEO Tom Stanton, the company’s carrier and enterprise businesses are gaining strength, both in the U.S. and internationally. Broadband Access did well once again on the back of higher sales to Tier 1 customers in the U.S. ADTRAN gained share at Tier 2 and Tier 3 accounts as well, and is currently engaged in trials for another product at Tier 1 and Tier 2 customers.

Management also focused on the activity of two of its major Tier 1 customers in the U.S and Europe. The U.S.-based carrier is most likely AT&T, which is one of ADTRAN’s major customers.

AT&T seems to be on the front foot and is making aggressive moves to improve its business. It is aggressively upgrading its networks. Besides this, AT&T has a strong investment strategy as well. It is planning to spend $14 billion on wireless and wire line broadband networks over the next three years. The carrier is looking to cover 99% of its customers with “high-speed IP Internet access” in wire line locations, while 75% locations are expected to be covered in wired IP broadband. These moves should help ADTRAN’s top line going forward.

Better Than Peers

ADTRAN also saw good results as its peers under performed. For example, F5 Networks posted disastrous preliminary results. F5 lost almost one-fifth of its value in a single day after its preliminary results came in way short of Street expectations. The company is attributing the weak performance to a delay by its North American telco customers in closing deals which were expected to go through.


ADTRAN looks expensive with trailing P/E of 31. Also, the forward P/E is quite high 25. This means that the company is slated to see an increase in its earnings going forward. Also, ADTRAN pays a dividend. All these factors indicate that ADTRAN could be a solid buy going forward.

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