This year, telecom gear maker ADTRAN has been crippled by slower telecom spending in the U.S. Although the company's international sales have been growing at a rapid pace, it isn't finding the same traction in the domestic market. Earlier, it looked like ADTRAN would benefit from AT&T's Project VIP roll-out. However, this hasn't been the case, so far.
Investors seem to be losing confidence in the stock, which is down in the high teens this year. Also, ADTRAN's first-quarter results were negatively received due to concerns that slow domestic telecom spending will continue going forward. However, the long-term investor might sense an opportunity in ADTRAN's decline this year, as there are a few key areas that might drive its growth.
The domestic market should improve
The first quarter started slowly for ADTRAN, as the company saw weak spending in the Tier 2 and Tier 3 carrier markets. However, the situation improved toward the end of the quarter and should gain momentum going forward, as the FCC's Connect America Fund, or CAF, initiative gains steam.
Presently, telecom carriers are transitioning from the erstwhile Universal Service Fund and Intercarrier Compensation to the new CAF, which is focused on broadband growth. The FCC has enhanced funding for CAF in the second phase of the implementation, and ADTRAN is hopeful that this will drive up telecom spending going forward.
Also, ADTRAN management believes that the roll out of ultra-high-speed access will be another catalyst going forward. For example, Google is gradually rolling out its Fiber service, which it claims to be 100 times faster than average broadband speeds. As reported by Ars Technica, Google has identified nine metro areas in the U.S. within which to expand Google Fiber. The company has invited 34 cities in these nine metros to partner on the deployment of its fiber optic network.
ADTRAN might be a beneficiary of this disruptive move from Google. According to Raymond James & Associates (via Barron's), ADTRAN's broadband exposure can help it gain business from Google going forward.
On the other hand, even AT&T announced in April that it might deploy its fiber optic service to 100 cities and municipalities, including 21 new metro areas. After this move, AT&T will be able to offer speeds up to 1 Gigabit per second with its own ultra-fast fiber network. This is a part of AT&T's Project Velocity investment plan worth $14 billion that was initiated to enhance wireless and wireline IP broadband networks.
So, ADTRAN might see a pick up in its domestic business as a result of these developments.
International growth and margin expansion
The international market accounts for approximately 36% of ADTRAN's revenue, and it is growing rapidly. In fact, international sales were up 56% year over year in the first quarter. ADTRAN's broadband access products are in good demand in markets such as Latin America, Europe, the Middle East, and Africa. In addition, ADTRAN is seeing acceleration in the vectoring rollout in Europe, leading to strong momentum in its VDSL products.
Moreover, an increase in sales of the broadband products has resulted in a solid improvement in its gross margin. In the first quarter, ADTRAN's gross margin was 52.9%, an impressive jump from 48.7% in the year-ago period. In the future, the margin figure should improve further as the adoption of the company's new products continues.
Cheaper than before
ADTRAN's share price decline earlier this year has made the stock cheaper. It now trades at 27 times last year's earnings, but at just 17 times next year's earnings. Given that the company is recording solid growth in gross margins, there's a good chance that its earnings will increase going forward.
Moreover, considering its low debt of just $30 million, strong cash position of $142 million, and a decent dividend yield of 1.60%, ADTRAN looks like a good buy. So, with the stock trading close to its 52-week low, it might be a good time to buy ADTRAN, as it looks well-positioned for the long run.
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The article This Telecom Gear Maker Looks Like a Good Bet Near 52-Week Lows originally appeared on Fool.com.Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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