What: Having gained 12% in the Wednesday trading session thanks to a modest but solid second-quarter report, shares of Sonus Networks (NASDAQ:RBBN) followed up with another skyward leap on Thursday. Shares had surged more than 17% higher by 3:30 p.m. after analyst firm Barrington Research upgraded the stock to a "buy," with a $10 price target that leaves room for another 20% hypothetical gain.
So what: Citing a fruitful cost-savings program and the promise of stronger sales in the second half of 2015, Barrington analyst Ted Moreau, Jr. predicted stronger operating margins in future quarters.
Now what: Moreau specified that these improvements "could drive operating profit margins back into the mid-teens by Q4." I don't know about that -- it's a mighty tall order.
For a frame of reference, Sonus saw a negative 8.8% operating margin in the second quarter. The GAAP operating margin was even deeper in the red ink, at negative 27.5%. Both were solid improvements over the first quarter, but also huge disappointments next to the year-ago period. There, GAAP operating margins were a negative 6.4% but adjusted margins rose up to 6.5% of positive operating profits.
Yes, the company's cost savings are running ahead of schedule. Yes, Sonus surprised analysts with a solid showing in the second quarter. But the business lost a lot of mojo in the previous two reports.
I can only applaud Barrington for releasing a gutsy, market-moving research report, and I'm sure that Sonus owners want this forecast to be right. I just don't see how these sudden and substantial margins boosts are supposed to work, short of landing a bevy of as-yet unexpected telecom orders and slashing operating costs even further.
Could it all work out? Sure, but it's highly unlikely.
I'm not buying what Barrington is selling, because the company still has to prove that it can execute its turnaround plan in more than a single, atypical quarter. Thank you, but I'm still staying on the sidelines while current owners enjoy this sudden 32% pop over two days.