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Adtran: Plenty of Value Remains

NEW YORK ( TheStreet) -- Carrier spending, or lack thereof, continues to be the major growth culprit among telecom stocks. While I believe Adtran's (ADTN - Get Report) management has exceeded all expectations relative to the industry's struggles, investors have demanded more. And this is despite the company having reversed 2012's stock loss of 34% with 40% gains last year.

Adtran's strong performance last year wasn't easy. Although the likes of Verizon (VZ) and AT&T (T) have loosened their purse strings to reinvest capital back into their infrastructure in an effort to win some of those deals, competition from Cisco (CSCO) and Ciena (CIEN) also inched up several notches -- to the extent that Cisco was willing to sacrifice some margin.

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Despite these threats, Adtran's management consistently delivered strong profits, helped by above-average gross margin and operating margin. This indicated how strongly positioned its products were even amid Cisco's pricing pressure. Investors took for granted the manner in which Adtran was able to offset the recent slowdown while bigger names like Juniper (JNPR) and F5 Networks (FFIV) dropped off the grid.

With Adtran shares trading at price-to-earnings ratio of 41, more than 3 times that of Cisco, it's hard to make the "value" argument now. In fact, there are some analysts that believe the stock is destined to fall. But even if that were to happen, I don't see any fundamental reason to assume the decline would be anything other than profit-taking. I wouldn't blame investors for this. It's hard to pass up.

Adtran still possesses the ability to leverage its technological advantages to grow. The thing to remember here is that management has never been shy about taking innovative risks to grow its bottom line. As long as that culture exists, there's no question that Adtran is perfectly positioned to capitalize in carrier spending and overall enterprise IT.

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On Wednesday, management will need to sell the Street on Adtran's long-term prospects by offering encouraging guidance. I believe this is the only way to avoid a near-term sell-off, regardless of the numbers. The Street will be looking for earnings-per-share of 14 cents on revenue of $159 million, which would represent year-over-year revenue growth of close to 14%.

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