Adtran's Looking Like a Bargain

"How much worse can things get?" is never a glowing endorsement. But in the case of Adtran (NASDAQ: ADTN  ) , it's hard to not like the company's prospects after it lost 34% of its value in 2012. But Adtran was not alone. It was one of several names (including Alcatel-Lucent) that suffered in the poor carrier-spending environment. But these shares look interesting. And with continued improvement in its business and consumer demand, Adtran could be one of the best bargains in the sector.

In-line quarter was as good as a beat
When Oracle picked-off Acme Packet (UNKNOWN: APKT.DL  ) , I started canvassing the sector to figure out who was next. I thought it signaled consolidation. And considering Acme Packet's tough time -- posting soft revenue due to its heavy reliance on carriers -- Adtran was as good a candidate as any. Adtran's fourth-quarter results weren't great, either, but were in line with expectations. Revenue dropped 20% year over year and 13.7% sequentially.

As has been the case with larger players like Cisco (NASDAQ: CSCO  ) , Adtran's enterprise hardware was heavily affected, down 6% year over year. But the company was able to offset the slowdown with growth from dealer channels. And I think this area will be key this year -- and as Adtran is assessed in the future. Likewise, the company is making strides with value-added resale channels, which increased 12%, helped by growing demand of the Bluesocket wireless LAN product.

Adtran continues to be underestimated for its technology. While this company is not flashy and doesn't generate headlines, it does not mean it lacks in innovation or demand. Both broadband access and Internetworking haven't performed as well lately. But these are good businesses that should see a revival going forward. However, the weak spending environment really took a toll on a sequential basis. Even so, broadband surged 100% year over year. Surprisingly, though, amid tough fiscal concerns overseas, Adtran posted 9% growth in international revenue.

This quarter was far from robust. But it was consistent with what the Street has been seeing from the likes of F5 Networks and the aforementioned Acme Packet. In-line results in this environment are wins, as far as I'm concerned. And it seems investors seem to agree. The stock has been up as much as 14% since the announcement.

Where's this company going?
I've always liked Adtran. But its lack of aggressiveness and conservative approach gets lost in sector that is dominated by big egos. The company's acquisition of the Broadband Access Business -- or BBA-- from Nokia Siemens, which completed last year, was a welcome signal that perhaps things are beginning to change. I think this company has a chance to become a leader within a recovering industry.

For Adtran, the good news is that it has three prominent carriers in VerizonQwest, and AT&T, which account for close to 55% of the company's revenue. It also signals an overreliance. Oracle didn't care much, even though 80% of Acme Packet's revenue relies on carriers. But trying to pinpoint when carriers are going to open their wallets is not easy. And I think Adtran's management understands this.

To that end, the company has shown a strict focus on preserving margins. But the results were mixed. Gross margin dropped by more than 1% sequentially and more than 8% year over year. Even though it didn't appear as if management fully anticipated the higher costs of the BBA service business, investors should expect some improvements in the coming quarters.

Gains still to come
If Adtran can get more aggressive in its strategic focus, I think this company can impress a name like Cisco enough to consider an acquisition. That's not to say it's not attractive today. I think Adtran has some attractive assets that would appeal to Cisco -- the Bluesocket wireless LAN product being one example. Plus, Cisco can't ignore the 100% year over year growth in broadband access business.

In the meantime, it's interesting that Adtran is beginning to attract analysts' attention. Stephens recently issued a downgrade citing valuation, yet maintained a price target of $25, which is almost 20% below Friday's close of $21.14. This sums up the finicky nature of this sector. In other words, Adtran is doing better than expected, and it's doing so too soon, which is always a good buy signal.

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