Buy Adtran Ahead of Earnings

NEW YORK (TheStreet) -- Shares of Adtran (ADTN) closed up 3.4% to $19.18 Monday, two days before the company is expected to report its first-quarter earnings.

While Adtran experienced a difficult 2012, losing more than 34% of its value due to poor carrier spending, the company's fourth-quarter results were broadly positive. And with continued operational improvements, these shares are looking interesting.

Adtran's most recent earnings produced revenue that dropped 20% year over year and 13.7% sequentially. Adtran's enterprise hardware took a hit, down 6% year over year. While these are not breathtaking results, it's not as if Adtran was being significantly outperformed by rivals. The challenging carrier spending environment made it tough on all telecoms, including bigger names like Juniper ( JNPR).

However, Adtran was able to offset the slowdown with better-than-expected results from dealer channels, which increased 12%, helped by growing demand of the Bluesocket wireless LAN product. Investors have to be encouraged by these improvements. This is going to be an area of strength for Adtran down the road.

The strong growth in dealer channels is important as it gives Adtran a clearer path towards sustainable growth. it's something to monitor in the near term. And investors should focus on what management has to say about new developments during the conference call. However, analysts have not appeared impressed.

It seems the Street is still underestimating Adtran's technology. Granted, Adtran is not as sexy as Cisco ( CSCO), but the company has not carried the growth risks of F5 ( FFIV), either. However, where Adtran may lack in flair, the company has made up for it in execution.

To that end, Adtran has solid broadband access and internetworking segments that should pay some good dividends in the coming quarters. The fact that the Broadband business surged 100% year over year, coupled with 9% growth in international business, puts Adtran in a position to attract some attention from the likes of Oracle ( ORCL), which just acquired Acme Packet ( APKT).

Though there are still some weaknesses, overall investors have to be pleased with the company's direction. The good news though, is that Adtran has three prominent carriers in Verizon ( VZ), AT&T ( T) and Qwest, which accounts for close to 55% of the company's revenue, and each are expected to increase their spending as the year progresses.

In the meantime, profitability should continue to improve, given the company's attention towards preserving margins along with better cost management. With earnings due out Wednesday after the market closes, analysts are expecting 8 cents per share on revenues of $139.82 million. This would represent 4% year-over-year growth and flat sales sequentially.

Given the current environment, this should be considered a win. I've always liked Adtran. But I would be more excited if the company were to be a bit more aggressive. With carrier spending expected to rebound, the companies that will prevail are the ones that are best positioned to deliver the right mix of equipment, communication services and at the right price. It's hard to not bet on Adtran.

At the time of publication, the author held no position in any of the stocks mentioned.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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