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Shares of Acme Packet (APKT) spiked up on Friday, ending the day with gains of 12.0%. The provider of session delivery network solutions received an upgrade from analysts at Stifel Nicolaus bolstering demand for its shares.

Analyst Upgrade

Analysts at Stifel Nicolaus boosted their rating from hold to buy and attached a $27 price target. Analyst Sanjiv Wadhwani increased the estimates for both revenue and earnings as the company stands to benefit from the rollout of VoLTE.

Acme Packet has been hit by delays of the development by telecom carriers of the VoLTE deployment. Stifel Nicolaus now expects that the ramp up in activity will boost sales in the short to medium term. For the year of 2013, the broker expects Acme to generate sales of $303 million on which it could earn $0.51 per share.

Shares of the company rose to almost $24 per share on Friday, leaving another 12.5% upside according to analysts.

Valuation

Acme Packet ended its third quarter with $363.5 million in cash, equivalents and short term investments. The company operates without any debt, for a sizable net cash position.

For the first nine months of 2012, Acme Packet generated revenues of $203.7 million. The company reported a $3.2 million loss as revenues fell compared to last year, but expenses kept increasing across the board. The company guides for full year revenues of $270-$275 million, on which it expects to report a $5-$8 million loss.

Factoring in Friday's gains, the market values Acme at $1.61 billion. This values operating assets of the firm at $1.25 billion, which values the firm at 4.5 times annual revenues.

The company does not pay a dividend at the moment.

Some Historical Perspective

Shareholders of Acme Packet have experienced a difficult 2012. Shares started the year in the high-twenties and rose to highs of $36 in February. After lowering its full year outlook twice in a row, shares fell to levels around $15 during the summer. The company announced a share repurchase program to benefit from the lower share price, which provided support for the shares. Shares rallied some 60% from that point in time to levels around $24 per share.

Longer term shareholders have seen a boom-bust cycle. Shares rose from $3 in 2008 to all time highs in the eighties last year. Despite the recovery in 2012, shares are still trading almost 75% from their peak. Between 2008 and 2012, Acme increased its annual revenues from $116 million to an estimated $275 million in 2012. The company has been profitable in recent years, but the poor revenue developments in 2012 resulted in modest losses so far this year.

Investment Thesis

Investors were relieved that there was finally some good news about Acme to start the new year. The convincing upgrade and the fact that many speculators still have large short positions in the firm triggered a rally as some investors got squeezed.

Shares have been hit hard in recent years on runaway expectations in 2011, as well as poor execution and market circumstances in 2012. Main carriers including Verizon (VZ) and AT&T (T) cut back on LTE spending over the past year.

The company announced a $200 million share repurchase plan in the summer to take advantage of the 80% decline in its shares, thereby providing a strong base for the share price. Yet the short term performance remains worrying. At the midpoint of the fourth quarter revenue guidance, revenues are expected to fall some 17% on the year before. In comparison, third quarter revenues were down 7.5% compared to 2011.

The long term prospects for LTE remain good, although major US carriers cut back their spending on the technology in 2012. Many expect that the first commercial carriers will offer the technologies at the end of 2013. Despite the delay in the roll-out, Acme will eventually benefit from the developments as increased data usage by smartphones require a nationwide upgrade of wireless networks in the coming years.

The technology of voice over Long Term Evolution allows customers to make faster and better voice calls when the technology is rolled out in the future. Unlike 2G and 3G technologies, VoLTE treats voice as data using internet protocols. As such voice will be treated in the same way as data, were before data and voice were separated, which makes wireless networks more efficient.

While the long term prospects remain good, the short to medium term prospects are highly uncertain, depending on the pace at which major carriers roll out VoLTE, among others. While the strong cash balance, and the share repurchase program provide a margin of safety for investors, the operating performance is dismal at the moment. The valuation is not appealing enough despite the margin of safety for me to pick up any shares at the moment.

Source: Shares Of Acme Packet Are Off To A Strong Start After Analyst Upgrade