There’s a high probability that AT&T Inc. (NYSE:T) is the customer from whom ADTRAN is getting orders for a multi-year upgrade, as another AT&T Inc. (NYSE:T) supplier, Ciena Corporation (NASDAQ:CIEN), had also indicated multi-year “re-architecturing” of networks. Ciena Corporation (NASDAQ:CIEN)’s management had stated that network upgrades have begun and would continue to help it get better going forward.
Ciena Corporation (NASDAQ:CIEN) has been surprising the Street over the past two quarters as telcos continue to roll out faster networks and its close link with AT&T Inc. (NYSE:T) suggests that Ma Bell is in a mood to spend money, which should help the likes of ADTRAN going forward as well. AT&T Inc. (NYSE:T) is expected to spend $20 billion a year on average in the next two years, and this upgrade cycle is probably the one ADTRAN is counting on.
In addition, throw in the rapid growth of ADTRAN’s international business, led by one of its important European customers, along with share gains at Tier 2 and Tier 3 customers, and we see that outlook for revenue looks bright. International revenue had grown 91% in the previous quarter and ADTRAN is looking to go on the offensive by strengthening its dealer channel as it is adding more value added resellers.
So, all in all, even though revenue would decline from the year-ago period, the trend looks to be on the positive side on a sequential basis.
This might prove to be a tricky area. ADTRAN has a mixed history on earnings, beating significantly the last time, meeting estimates before that, and missing on two occasions. As I’d mentioned earlier, ADTRAN’s earnings were driven by its share repurchases, and the company is aggressively following that path to support earnings.
It recently announced another repurchase plan wherein it would be buying back 5 million shares, which comes to around 8% of its outstanding float. These buybacks might continue to support earnings going forward, but it cannot be ignored that ADTRAN is struggling with declining margins, as evidenced by a drop of 6.3 percentage points in the first quarter on a yearly basis.
Nevertheless, the earnings estimate is pegged at a lowly $0.16 per share for the second quarter, less than half of the $0.33 it had earned in the prior year period. Given the fact that revenue is expected to improve on a sequential basis, I would count on ADTRAN to at least meet the estimate since its gross margin had also improved sequentially in the first quarter and earnings per share were, in fact, higher than the second quarter’s estimate.
The bottom line
There’s a good chance that ADTRAN would continue its resurgence as indications about its business are positive. But then, it doesn’t make sense to buy more shares right now as the stock is trading at an expensive trailing P/E of 37. However, if ADTRAN does falter and shares head lower, investors should consider scooping up some shares as the company’s business is gradually improving.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Be Prepared, a Crucial Week Is Coming up for This Company originally appeared on Fool.com is written by Harsh Chauhan.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.