6 Telecom Stocks to Watch

NEW YORK (TheStreet) -- Shares of telecommunications companies Vonage Holdings (VG), Global Crossing (GLBC), tw telecom (TWTC), AboveNet (ABVT), SureWest Communications (SURW) and inContact (SAAS) could see significant gains in coming months, according to analysts' 12-month price targets.

With markets reacting to news of Google's ( GOOG) acquisition of Motorola Mobility ( MMI), telecommunication stocks are in the spotlight.

These six telecom stocks we have selected have strong fundamentals.

The average consensus price target for these stocks over the next 12 months is 37%. On average, each of these stocks has 63% of analysts giving it a buy rating.

We have not included larger communications stocks AT&T ( T) and Verizon Communications ( VZ) because analysts' expectations for their upside potential are lower.

We have listed the stocks in ascending order of upside implied by the average analyst price target.

6. tw telecom provides communication services, including voice and data networking solutions.

Revenue for the June quarter was $338.4 million, up from $316.8 million a year earlier, driven by strong enterprise revenue growth. Revenue increased $5.9 million sequentially from $332.5 million, representing the 27th consecutive quarter of sequential growth.

Operating income during the second quarter was $46.2 million, vs. $35.7 million a year earlier. Cash flows from operating activities increased to $116 million from $92.9 million in the year-ago quarter. Cash, equivalents and short-term investments stood at $590 million.

Given the strong business fundamentals, TW Telecom has raised its annual guidance for 2011 capital expenditures to $340 to $350 million. Analysts surveyed by Bloomberg have an average 12-month price target of $22.90, implying upside of about 21% from recent levels. Of the analysts covering the stock, 47% rate it a buy.

5. AboveNet provides bandwidth-connectivity solutions.

Net revenue for the second quarter of 2011 rose 17.5% to $118.3 million from $100.7 million in the year-earlier quarter and was attributed to strong growth from wide area network services. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $54 million, up from $45.7 million in the year-ago period.

"As the market for high bandwidth transport continues to broaden, our end-to-end solution approach is becoming a more attractive proposition for our customers. Our facilities-based network reach and Tier-1 datacenter connectivity place us in an excellent position to continue to expand our addressable market and leverage our fiber-rich assets," said Bill LaPerch, CEO of AboveNet.

Capital expenditures for the quarter were $37.3 million, rising from $30.1 million in the second quarter of 2010. Cash and cash equivalents at the end of June 2011 were $96.4 million vs. $61.6 million as of Dec. 2010.

The company's revenue guidance for 2011 ranges from $460 million to $470 million.

Seventy-five percent of analysts rating stock assign it a buy rating. The average 12-month price target of analysts surveyed by Bloomberg is $76, which is 27% greater than current levels.

4. inContact provides network connectivity solutions and operates in the telecom and software segments.

Consolidated revenue for the second quarter was $21.7 million, up from $20.4 million in the year-earlier period. Revenue from the software segment rose 14% from the second quarter of 2010 to $9.5 million. Quarterly telecom revenue increased for the first time in the last four years, driven by software-related telecom revenue.

The company's gross margin was 42% during the quarter, compared with 43% for the same period in 2010. Gross margin was impacted by higher investments in the software segment.

On the client rollout, Paul Jarman, inContact's CEO, said, "We closed 33 new customers and 14 expansion deals, for a total of 47 new contracts in the quarter. In addition, we recently announced several new enterprise customer wins including a new Fortune 500 customer, a global communications company, as well as one of the leading hospitality brands in the United States. We now have 23 of the Global or Fortune 500 as software customers and nine customers that bill more than $500,000 per year."

On average, analysts have a $5.30 12-month price target on the stock, which is about 45% greater than recent levels. Of the analysts covering the stock, 75% rate it a buy.

3. SureWest Communications provides telecommunications and Internet services.

Consolidated revenue increased to $61 million during the second quarter of 2011, up 1% on higher broadband revenue. Consolidated adjusted EBITDA margin was 36%, compared to 33% in the same period of 2010. The quarter was positively impacted by $0.3 million in quarterly savings and an expense reduction in universal service fund fees of $1.4 million.

Net income for the quarter was $1.3 million against a net loss of $0.527 million in the same period of 2010. Capital expenditures totaled $20.7 million for the second quarter vs. $13.9 million in the same period of 2010.

The leverage ratio stands at less than 2.5 times.

On average, analysts have an $18 12-month price target on the stock, about 51% greater than recent levels. Seventy-five percent of analysts covering the stock rate it a buy.

2. Global Crossing is a leading provider of communications services.

The company reported consolidated revenue of $692 million for the second quarter of 2011, increasing 10% year-over-year.

Operating income before depreciation and amortization was $96 million, up from $84 million sequentially and $93 million in the year-ago quarter. The sequential growth was driven by an improved revenue mix.

The company had total cash of $259 million and generated free cash flow of $10 million in the quarter vs. a negative $13 million in the year-ago period.

On average, analysts expect the stock to gain about 57% over the next year. The stock has more than doubled in the last year, and 60% of analysts covering the stock rate it a buy.

1. Vonage Holdings is a provider of communications services and supplies broadband devices.

For the second quarter, the company generated adjusted EBITDA of $44 million, up from $41 million in the year-ago quarter. Income from operations increased to $31 million from $24 million in the same period prior year.

Net income came in at $22 million, improving from a net loss of $1 million in the year earlier period.

Referring to the current quarter, Marc Lefar, CEO, said, "The launches of Extensions and Time to Call enhance our domestic and global service offerings for landline and mobile customers. Beyond this, we've expanded the availability of our service through agreements with TracFone, Best Buy, Kmart and Sears. And, as a result of our strong financial performance, we have refinanced our debt for the second time in eight months."

Vonage announced the completion of a debt refinancing deal that reduced interest rates to LIBOR plus 3.5%, resulting in annual savings of $43 million from 2010.

On average, analysts surveyed by Bloomberg expect the stock to gain about 64% from recent levels. Sixty percent of them rate the stock a buy.

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