CAPScall of the Week: Calix

For years satirical late night host Stephen Colbert has been running a series on his show known as "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the national stock exchanges.

That's why I propose that this week and every week from here on out, I make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's inaugural go-round of what I'd like to call "Better Know a Stock," I'd like to take a closer look at Calix (NYSE: CALX).

What Calix does
Consider Calix the middleman between you and your cable company. Calix provides hardware and software to communication service providers that regulate the amount of bandwidth, range, and quality of service that can be offered to a CSP's customers. Its products are designed in such a way that CSPs can easily adapt their strategy to meet changing consumer needs with minimal costs.

Who it competes against
As you can imagine, the field for communication equipment related to anything fiber-optic is very crowded. Specifically, Calix's primary competitors include ADTRAN (Nasdaq: ADTN), Alcatel-Lucent (NYSE: ALU), and Tellabs (Nasdaq: TLAB).

The real differentiating factor between these companies tends to be the customer base they often lure. Alcatel-Lucent, Tellabs, and to some extent ADTRAN tend to be focused on larger telecom providers whereas Calix has a strong customer niche with midsize telecom providers. Whereas large telecom providers like AT&T have seen capital spending ebb and flow in recent quarters, midsize telecoms are just beginning to get their infrastructure up and running, which is a good sign of future growth for Calix.

Here's a quick rundown of how Calix compares to its peers:

Source: Morningstar. NM = not meaningful.

There's definitely a premium to be paid for growth in the communications equipment sector. ADTRAN, for instance, has exclusively claimed Frontier Communications (NYSE: FTR) as its client and has benefited from the company's infrastructure build-out since purchasing some of Verizon's operations in 14 states. Alcatel-Lucent and Tellabs, on the other hand, have suffered for years as large telecom companies haven't been spending as much as they had in the past.

The call
After reviewing its prospects, I have chosen to make a long-term CAPScall of outperform on Calix. I feel the company is perfectly positioned to continue to grow rapidly thanks to the strong capital spending from small and mid-tier telecom companies. In addition, it's quite possible that a larger customer like Frontier or AT&T could wind up diversifying its product line and incorporating Calix's networking products into the mix. Calix has a healthy cash position of $38.9 million on its balance sheet with no debt, and is trading at a forward P/E of just 9.9. To me, this seems like growth at a very reasonable price.

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