Network equipment supplier stocks have been in hibernation (at least if you look at their highs) since the dot-com bomb exploded. But yesterday the group came out of the cave into the sun for a while when ADTRAN
Analysts were looking for earnings of $0.31 a share in the third quarter and $1.09 for the year. ADTRAN said that bookings were running stronger than expected and that next quarter's earnings would be $0.38 to $0.40. The year would then come in at $1.18 to $1.22 a share. So are we on the verge of an equipment supplier market boom again?
Well, not exactly.
ADTRAN reported disappointing second-quarter results compared with the year-ago quarter. Revenue decreased 1.4%, although carrier networks (75.1% of total sales) had a 3.1% increase in sales. Enterprise networks (the remaining 24.9% of total sales) showed sales weakness -- net income fell 3.2%.
As disappointing as those numbers look, the CEO said they were stronger than anticipated thanks to strength in DSL, optical access, and NetVanta products (for the value-oriented enterprise networking market) -- the same areas of strength cited in the company's glowing assessment of the upcoming two quarters.
So where is the revenue strength coming from? Look no further than the incumbent local exchange carriers (ILEC) such as Verizon
The ILECs have been using aggressive pricing and alliances to push DSL sales. They're fighting to establish a broadband beachhead to blunt cable companies such as Comcast
The ILECs are helping the turnaround at ADC Telecommunications
The telecommunications industry recovery is real (although not booming), and yesterday's good news for ADTRAN sent its stock up 17.6% -- and it's holding those gains today.
Analysts expect ADTRAN to grow earnings 15.0% annually for the next five years, and the stock currently trades at 23 times 2006 analyst estimates. Although ADTRAN is cash rich, the telecommunications marketplace is teeming with competition and extreme pricing pressure. To this observer, ADTRAN is priced to perfection in an imperfect marketplace, and I'm thinking it's a bit overvalued.
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