In the face of wireline equipment provider ADC Telecommunications'
I have mixed feelings about the earnings reported for the company's fiscal second quarter. I can't quite place my finger on exactly why, but I come away with a general sense of unease. Revenue growth was all right, up about 17% overall with seemingly solid growth across the connectivity business. Operating leverage was a little soft, though, as margins fell on both a reported and pro forma basis.
The margin question is one that I think is going to endure. Management has been talking about boosting margins to the mid-teens range, but that would seem to be a pretty aggressive goal at this point. After all, Andrew will make up about half of the new company, and it hasn't had mid-teen or better margins since the early days of the tech bubble.
And let's not forget that ADC's customers have an indirect say in the sort of margins they can get. Customers like Verizon
The more I think about the ADC-Andrew deal, the more I wonder how well it'll ultimately work out for ADC shareholders. Though it might be true that Andrew is suffering from temporary problems like high copper prices, I still think ADC might have paid too much for a company that I don't necessarily believe automatically improves the business. What's more, a lot of the supposed synergy here relies upon cost savings after the merger -- a target that many acquiring companies talk about in grandiose terms, but relatively few ultimately ever live up to.
If I were going to get into this general space, I'd probably look at Powerwave
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).