Placing My Bets on These 3 Telecom Stocks In 2013

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In 2012, the amount of capital spent among prominent carriers such as AT&T and Verizon have been abysmal. As a consequence, telecom equipment companies were not able to produce the level of growth that industry experts had anticipated due to their revenue dependency on carriers.

However, a rebound is 2013 is expected - to what extent remains to be seen. Still, even only a modest recovery can yield meaningful gains. For patient investors who are not adverse to risk, here are a few beaten down telecom stocks to consider with the potential for market beating performances in the New Year.

Acme Packet (NASDAQ: APKT) – Price Target $26

Leading off is Acme Packet, a leader in session delivery network solutions. The stock ended 2012 trading at a price of $22.12, which represents a loss of almost 30%. The company is intriguing because analysts seem to not always agree on the underlying value of the business. As a result, the stock zigzagged all over the map this past year.

The company started 2012 at a high of $31.91. The stock then surged upward over 17% to $36.27. Then suddenly shares plummeted to its 52-week low of $13.26, losing 63% of its value. The market immediately realized the importance of carrier spending, which represents 80% of Acme Packet’s revenue. Making matters worse, the stock was already expensive compared to rivals such as Ciena and Adtran.

However, there is cause for Optimism. Since reaching its 52-week low, shares have jumped 67% to current levels. Where expectations were once too high, investors have embraced not only what Acme Packet really is, but what it can become. The company has new technologies such as the Net-Net 6300 that should help stimulate growth over the next couple of years.

Features of the Net-Net 6300, which includes its ability to provide high-capacity network interconnect between service providers should help the company steal market share from rivals. What’s more, the device offers large-scale subscriber access environment such as VoLTE.

Another consideration is the company’s growth outlook, which is expected to be 12.5% per year for the next five years. This is not the robust growth investors have come to expect, but it will be enough to outperform a recovering industry. Plus, it’s hard to expect the stock to perform much worse. I would be a buyer at current levels and expect a 20% gain in 6 to 12 months.

Ciena (NASDAQ: CIEN) – Price Target $20

Unlike Acme Packet, there is clear evidence that the Street already believes in Ciena’s recovery. The stock jumped almost 5% recently despite the company having reported disappointing revenue results and lowering guidance for the current quarter. It seems the Street believes (as I do) that when fundamentals are solid, benefit of the doubt is deserved.

The rest of the report was mixed however. Revenue did improved 2% year-over-year. This is even though it declined by sequentially by 2%. But investors were pleased with how the company performed categorically, including 66% growth in Carrier Ethernet Service Delivery (CESD). Likewise, service revenue soared 21%.

Investors were also pleased with how well management navigated through a dark spending period to improve profitability.  Although gross margin dropped .5 points, it rose sequentially by over 3 points. The company has done a great job squeezing out every possible dollar that it can. This is despite posting slightly higher than expected operating expenses – attributed to R&D and administrative costs.

I like Ciena’s business. But I’m not sure if I’m comfortable that Wall Street likes it more than I do. In other words, while I do believe that the shares have more room to grow, I’m also tempted to believe that a considerable amount of my assumptions is already priced into the stock.

Ciena must show that it can innovate and leverage its existing technological advantage to fight off pricing pressure. I think the company will do precisely that. On that basis and the expected recovery in enterprise spending, the stock is undervalued by at least 25%. Aggressive investors would do well to take a position at current levels.

Adtran (NASDAQ: ADTN) – Price Target $25

Adtran is another name among the group that has become a bit tough to figure out. In many respects, the stock looks cheap. But it comes with a considerable amount of risk. The stock started 2012 at $29.70 and has lost 34% of its value. As with Acme Packet, 2013 can’t be any worse with increase carrier spending on the way.

The good news for Adtran is that among its customer base are three prominent carriers in Verizon, Qwest and AT&T. The bad news is that they account for close to 50% of the company’s revenue. So one can imagine the impact of brutal cyclical swings Adtran has experienced this year, including a brutal Q3, during which revenues and EPS dropped 74% and 15% respectively.

Nonetheless, Adran is a good company with a sound management team. The company has made the best out of a bad situation. What’s more, its problems have not been unique to Adtran but as I’ve noted, it’s impacted the entire industry. The company does have the ability to create separation among its peers.

For that to happen, Adtran needs to get more aggressive in its strategic focus. Being the best “low cost supplier” is just not going to cut it long term. Nevertheless, the stock is cheap. As with the two names above, aggressive investors would do well taking a risk here with the hope that the cash infusion that will come from carriers will make the expected difference.

rsaintvilus has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Acme Packet. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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