Can This Stock Script A Turnaround in 2013?

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Almost three months back, I wasn’t pretty sure about the near-term future of networking and communications equipment maker ADTRAN (NASDAQ: ADTN). Muted spending by telecom companies had constricted ADTRAN’s performance to such an extent that its top line declined 16% and earnings more than halved in the then-reported third-quarter.

Bouncing Back

But over the last three months, ADTRAN’s stock has appreciated close to 33% and it carries a lot of positive momentum going into its fourth-quarter report this week. The turning point came when AT&T (NYSE: T) announced early in November that it would be boosting its spending in the coming three years to improve its networks.

The news sent ADTRAN shares to seventh heaven since AT&T is its important customer. The telecom giant now aims to spend $14 billion over the next three years as it aims to move its customers to faster networks at an aggressive pace. This undoubtedly lights up ADTRAN’s prospects, and it won’t be surprising if the stock continues to climb during the course of the year.

The momentum is clearly in favor of the company and it would probably beat estimates which are already quite low. In addition, it could even provide a sunny outlook, which seems a given at this point as its major customer is looking to spend more.

The company has been witnessing a decline in the sales of its legacy HDSL products. The segment’s revenue almost halved in the previous quarter as a “major Tier 1 carrier reused its installed inventory” instead of purchasing new components. This segment might pick up this year along with carrier spending, driven by the presence of AT&T, Verizon and Qwest (now a subsidiary of CenturyLink) on its client rolls.

Also, the company had added as many as 27 Tier 3 customers to its existing clientele in the previous quarter, apart from landing a multi-year contract for broadband networks at a Tier 2 carrier. These contract wins, along with improved carrier spending, makes ADTRAN a good long-term play as well.

Some Concerns

However, there’s one negative point that sticks out and shouldn’t be ignored. The company’s legacy HDSL business hasn’t been doing too well, and ADTRAN accepts the fact that growth in coaxial cable and mobile wireless could hurt its “high-speed digital communications over the local loop utilizing copper wire.”

But, it seems that the company is spending more on product development, as evident from improved R&D spending over the past few quarters, to address this issue. Another point of concern is ADTRAN’s valuation. The stock trades at a P/E of 17.76, which is above the industry average of 14.75. Apart from this, it seems analysts aren’t expecting much from ADTRAN at the moment, as evidenced by a forward P/E of 28.49. The PEG ratio also sits at an unimpressive 2.88, whereas the industry average is just 0.85.

ADTRAN’s earnings declined to the tune of almost 36% through the course of 2012, and this seems to have dented its valuations to a large extent. Hence, even though there are quite a few arguments in favor of ADTRAN, I would like to see the company improve its margins and also guide for revenue improvement during FY13.

More News On The Way

The next earnings report on Jan.16 will surely shed some light on where ADTRAN is headed this year, and I won’t be surprised if management speaks in a positive tone on the conference call and guide for better days ahead.

To know more about ADTRAN, tune into this space again in a few days for the complete earnings analysis or add the stock to your Watchlist by clicking here.

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