The market was caught flat-footed on Tuesday when ADC Telecommunications (NASDAQ:ADCT) announced increased revenue and earnings expectations for the current (second) quarter. The share price of ADC rose by 17% in response. ADC now expects revenue from continuing operations to be in the range of $292 million to $297 million, which is about 12% higher than the earlier expectation of $260 million to $270 million. Also, earnings per share are expected to be $0.03, instead of $0.02.
I found the announcement interesting because I own some shares of ADC, and ADC, like many other companies involved in building networking products, has been left behind since the market bottomed in March 2003. This year, in fact, it has flopped over like a wet noodle. ADC's share price had fallen about 30% since the start of the year -- until Tuesday's leap. Obviously, the market did not expect the improved outlook.
A perusal of ADC's 2004 annual report shows that there are a number of reasons to continue to expect good things in the future. Here are three:
1. Fiber-to-the-X: Many companies are extending optical fiber closer to their customers. Verizon (NYSE:VZ), for example, has announced plans to extend fiber all the way to the homes (fiber-to-the-premises) of 3 million customers by the end of this year. Also, SBC (NYSE:SBC) has plans to extend fiber to the neighborhoods (fiber-to-the-node) of 20 million of its customers. These networks will allow their customers to receive high-speed Internet, video, and voice services (the "triple play").
2. A focus on more promising businesses: During 2004 ADC shed four businesses that, combined, consumed $69 million in cash from operations during the year. On the other hand, the businesses ADC is keeping generated a positive $72 million in cash from operations.
3. Improving gross margins: ADC's gross margins bottomed in 2002 at 19.9%. In 2003 gross margins clocked in at 35.1%, and they improved further in 2004 to 38.5%. These improvements show that ADC's products measure up well against the company's competition and it is keeping a lid on manufacturing costs.
There is some risk in owning these shares because of the stiff competition among network equipment makers. However, all of the aforementioned factors make me think that management is driving the business in the right direction. With a reasonable valuation, I think that ADC's business -- and it's stock -- will likely continue to improve.
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Fool contributor Dan Bloom owns shares of ADC, but none of the other companies mentioned. The Fool has a disclosure policy.
