I nibbled on some…
I nibbled on some Adtran common stock. And I shorted a tiny bit of Cablevision. These two trades aren’t necessarily for earnings season or anything…they’re longer term positions that I just didn’t have on the sheets yet. Here’s my Adtran analysis:
Adtran is an old name in the land of communications equipment with more than 1,700 different products sold directly through partners and distributors. They were a big supplier of T-1/E-1 equipment back in the day but they were probably best known in the mid-late 1990s as a purveyor of DSL (digital subscriber line) equipment to the phone companies. Yes, if your broadband connection is a DSL line from Ma Bell, there’s a good chance that it’s Adtran’s equipment sitting back at the central office.
The company developed three new business segments — Broadband Access, Optical and Internetworking — to go along with their legacy operations. As time has passed, the growth businesses have expanded to the point where they now drive operations and account for nearly two-thirds of today’s sales. Adtran is a major play on backhaul capital expenditures as its customers scramble to build out better, faster, more reliable wireless networks that need Adtran’s products underneath them to make them run. It believes that the bulk of its optical products are being directed at alleviating bandwidth issues in wireless backhaul.
The stock’s bumped up against resistance in the mid-40s, but it’s got great support at $40 or so. As estimates for 2011 include only 10% top line growth in an environment where wireless network buildups for smartphones and tablets can drive 20% top line growth and margin expansion, earnings expectations are probably too low.
Figure the Company can earn closer to $2.50 or so per share next year, which would have analysts closer to $3 per share in earnings for 2012. Throw an enterprise value to earnings ratio 15 to 20 on that and we’re looking at a price target closer to $60 than the $34 at the time of original publication.
(And more recently, I wrote the following update:)
The stock’s not as cheap as it was when we first put it in the portfolio, as the stock has rallied even faster that the company’s strong earnings growth in the last year. That said, it’s not expensive either at only 17x next year’s earnings, ex-cash. Adtran’s benefitting big time from the accelerating wireless network buildout going on in this country (and around the world).
This one is a high-risk/high-possible-return set up into earnings, as I do expect a strong report and with the recent pullback/consolidation in the stock coming down a good 10% from its recent new highs, the options in this name have some pretty big premiums, so I wouldn’t just plow into calls in this one, but I do think it is a good long-side common stock trade into earnings, and I wouldn’t be shocked to see this stock in the mid-to-high-fifties in coming months if the report is indeed good.
I’ll put the Cablevision analysis into the next post.