Our Top Stock Is Still Going Strong

Heading into this second-quarter report, Arris Group (Nasdaq: ARRS  ) looked like a loser. Rattled by a string of bad news from other network-gear makers, investors had sent Arris shares on a long, slow downward swoon in July -- capped with a sudden 3% drop on the very eve of the report.

And why not? As soft as Arris looked, those already-reported industry peers were far worse off. For example:

Company

Return From 
July 1 to July 27

CAPS Rating 
(out of 5)

Arris (2.5%) *****
Juniper Networks (Nasdaq: JNPR  ) (20.0%) **
LM Ericsson (Nasdaq: ERIC  ) (10.7%) ***
Harmonic (Nasdaq: HLIT  ) (19.0%) *****

Data from Google Finance and Motley Fool CAPS.

And that's where Arris came through with some good news, even as yet another networker tanked -- Alcatel-Lucent (NYSE: ALU  ) fell as much as 22% on Thursday thanks to a terrible earnings report. Arris didn't even need a blowout report to justify a sudden jump, but took a 14.5% intraday leap on rather humdrum results.

Sales fell 5% year-over-year to $266 million and non-GAAP earnings stayed flat at $0.24 per share. That's a $5 million miss on the top line but a $0.06 stomping of earnings estimates, and third-quarter guidance ranges nestled right around Wall Street's projections. One foot in the freezer and one on the stove, and you'll feel all right on average.

Arris cleared out some of its order books this quarter, reducing last quarter's $178 million backlog to $154 million and thus shrinking the book-to-bill ratio well below the crucial 1.0 mark. That means less visibility into upcoming revenue-generating billings and is generally a bad thing.

That said, CEO Bob Stanzione said that visibility is actually increasing, lower book-to-bill ratios notwithstanding. That's because cable customers are showing high interest in a number of new Arris products, including the Home Media Gateway that was just rolled out to its first customer, Canadian cable guy Shaw Communications (NYSE: SJR  ) . Stanzione sees this product alone producing as much as 10% revenue growth for Arris in 2012. Largest customer Comcast (Nasdaq: CMCSA  ) currently contributes about 25% of Arris' revenue, and that's just with basic DOCSIS 3 system upgrades. If and when the leading cable company adopts those media gateways, I can certainly see Stanzione's prediction coming true.

So Arris shares have essentially moved nowhere in three months after Thursday's spike. At the start of 2011, we called Arris the top stock for 2011 in a special report and the stock has outperformed but not exactly crushed the S&P 500 benchmark since then. But the investing thesis remains intact and Arris should still fulfill our hopes in the second half or, belatedly, in 2012.

We've kept that report up-to-date throughout the year, so it still smells like daisies. Grab a fresh copy right now by clicking here and learn more about how Arris is poised to ride broadband expansion to new riches. Best of all, the report is 100% free!

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Motley Fool newsletter services have recommended shorting Juniper Networks. 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. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 29, 2011, at 2:46 PM, DanTheMan1984 wrote:

    Actually your wrong Alcatel-Lucent didnt have a terrible earnings report, get your facts straight.

  • Report this Comment On July 30, 2011, at 1:02 AM, Clint35 wrote:

    Adjectives like good bad and terrible are subjective in nature. Therefore open to opinion. Therefore Anders can't be wrong. You might disagree with him but that doesn't mean he's wrong.

  • Report this Comment On July 31, 2011, at 4:36 PM, TMFZahrim wrote:

    2% sales growth isn't good when analysts expected 16% and management planned to grow "equal to or faster than the market." For comparison purposes, Cisco grew sales by 5% and Juniper 15% -- and those numbers were disappointing. I don't think I'm being unreasonable.

    I do think that ALU is a fundamentally strong company and that the stock will bounce back, given time. But this wasn't a good ALU report by any reasonable definition of "good".

    Hope that clears up my position,

    Anders

  • Report this Comment On August 01, 2011, at 5:12 PM, paddlinfaster wrote:

    Once AGAIN I ask - how can this be "The Motley Fool's Top Stock of 2011" & yet NOT be a SA or RB pick?

  • Report this Comment On August 02, 2011, at 7:35 AM, TruffelPig wrote:

    The outlook for ARRS is meager with the two main customers stalling in growth. 2011 is definitely not the year for ARRS thus far.

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