The market was caught flat-footed on Tuesday when ADC Telecommunications
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
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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