This Telecom Gear Maker Looks Like a Good Bet Near 52-Week Lows

This telecom gear maker is down, but not out.

Jun 18, 2014 at 2:30PM

This year, telecom gear maker ADTRAN (NASDAQ:ADTN) has been crippled by slower telecom spending in the U.S. Although the company's international sales have been growing at a rapid pace, it isn't finding the same traction in the domestic market. Earlier, it looked like ADTRAN would benefit from AT&T's (NYSE:T) Project VIP roll-out. However, this hasn't been the case, so far. 

Investors seem to be losing confidence in the stock, which is down in the high teens this year. Also, ADTRAN's first-quarter results were negatively received due to concerns that slow domestic telecom spending will continue going forward. However, the long-term investor might sense an opportunity in ADTRAN's decline this year, as there are a few key areas that might drive its growth.

The domestic market should improve
The first quarter started slowly for ADTRAN, as the company saw weak spending in the Tier 2 and Tier 3 carrier markets. However, the situation improved toward the end of the quarter and should gain momentum going forward, as the FCC's Connect America Fund, or CAF, initiative gains steam.

Presently, telecom carriers are transitioning from the erstwhile Universal Service Fund and Intercarrier Compensation to the new CAF, which is focused on broadband growth. The FCC has enhanced funding for CAF in the second phase of the implementation, and ADTRAN is hopeful that this will drive up telecom spending going forward. 

Also, ADTRAN management believes that the roll out of ultra-high-speed access will be another catalyst going forward. For example, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is gradually rolling out its Fiber service, which it claims to be 100 times faster than average broadband speeds. As reported by Ars Technica, Google has identified nine metro areas in the U.S. within which to expand Google Fiber. The company has invited 34 cities in these nine metros to partner on the deployment of its fiber optic network. 

ADTRAN might be a beneficiary of this disruptive move from Google. According to Raymond James & Associates (via Barron's), ADTRAN's broadband exposure can help it gain business from Google going forward.

On the other hand, even AT&T announced in April that it might deploy its fiber optic service to 100 cities and municipalities, including 21 new metro areas. After this move, AT&T will be able to offer speeds up to 1 Gigabit per second with its own ultra-fast fiber network. This is a part of AT&T's Project Velocity investment plan worth $14 billion that was initiated to enhance wireless and wireline IP broadband networks.

So, ADTRAN might see a pick up in its domestic business as a result of these developments.

International growth and margin expansion
The international market accounts for approximately 36% of ADTRAN's revenue, and it is growing rapidly. In fact, international sales were up 56% year over year in the first quarter. ADTRAN's broadband access products are in good demand in markets such as Latin America, Europe, the Middle East, and Africa. In addition, ADTRAN is seeing acceleration in the vectoring rollout in Europe, leading to strong momentum in its VDSL products. 

Moreover, an increase in sales of the broadband products has resulted in a solid improvement in its gross margin. In the first quarter, ADTRAN's gross margin was 52.9%, an impressive jump from 48.7% in the year-ago period. In the future, the margin figure should improve further as the adoption of the company's new products continues.

Cheaper than before
ADTRAN's share price decline earlier this year has made the stock cheaper. It now trades at 27 times last year's earnings, but at just 17 times next year's earnings. Given that the company is recording solid growth in gross margins, there's a good chance that its earnings will increase going forward.

Moreover, considering its low debt of just $30 million, strong cash position of $142 million, and a decent dividend yield of 1.60%, ADTRAN looks like a good buy. So, with the stock trading close to its 52-week low, it might be a good time to buy ADTRAN, as it looks well-positioned for the long run.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers