ADTRAN, Inc. (ADTN), AT&T Inc. (T): Be Prepared, a Crucial Week Is Coming up for This Company

Shares of telecom gear maker ADTRAN, Inc. (NASDAQ:ADTN) have been on a roll this year, appreciating a tad more than 30% so far. The signs that the company would do well were clearly evident late last year, but the journey this year has had its share of potholes. Earlier this year, it looked as if ADTRAN, Inc. (NASDAQ:ADTN) would fail to capitalize on telecom spending and deployment of faster networks, and as a result, the stock was in the doldrums.

ADTRAN, Inc. (NASDAQ:ADTN)

The resurgence begins

However, a positively surprising quarterly report in April proved to be the catalyst and is the primary reason why the stock has risen like a rocket in the past three months. ADTRAN, Inc. (NASDAQ:ADTN)’s previous quarterly report was indeed surprising as I’d discussed in my previous post on the company, as earnings were boosted by a share repurchase program.

This was a major reason why ADTRAN, Inc. (NASDAQ:ADTN) posted earnings of $0.17 per share, miles ahead of the consensus estimate of $0.08 a share, and this led to a massive spike in the stock price. The stock was turbocharged after the report and has continued its journey north ever since.

But, the real challenge lies ahead next week on July 10, when ADTRAN, Inc. (NASDAQ:ADTN) releases its second-quarter earnings. Investors will be hoping that the momentum continues. But, will ADTRAN, Inc. (NASDAQ:ADTN) be able to replicate its prior quarter’s performance and provide positive commentary along with it? Let’s try to find out.

On revenue and outlook

Analysts expect ADTRAN to post revenue of $154 million, which translates into a decline of 16% from last year’s second quarter. While the year-over-year reading would probably look bad, ADTRAN has a strong history of at least meeting consensus estimates. It has satisfied revenue estimates in four out of the last five quarters, and while it doesn’t provide a specific outlook, management’s comments over the previous conference call indicate that the trend might continue.

The company is witnessing share gains at its various customers, and its Broadband Access business has been growing at a fast clip. Management had stated that it is seeing improvements in ADTRAN’s carrier and enterprise businesses and is optimistic about the future of these businesses as carriers around the world upgrade networks.

The fact that the company has been awarded initial orders for a multi-year network upgrade from one of its major clients, which might be AT&T Inc. (NYSE:T), should keep its revenue stream flowing forward. ADTRAN spiked considerably last year when AT&T Inc. (NYSE:T) announced that it would boost capital spending to upgrade its wireless and wireline broadband networks.

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.

On earnings

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.

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