Adtran Inc.: Poised to Benefit as Data Hungry Smartphones Support Capital Spending

| About: ADTRAN, Inc. (ADTN)
Investors knocked Adtran Inc. (NASDAQ:ADTN) 13% off March highs following earnings this month. But demand for backhaul equipment remains solid, suggesting investors can buy Adtran on sale ahead of revenue upside through the remainder of the year.
Why? Because the global mobile phone market remains strong with sales rising nearly 20% in Q1 versus 2010, according to IDC. Gartner expects global Smartphone sales will be up 58% in 2011, from 2010. As more data hungry consumers embrace phones, pressure mounts on carriers to increase speed as they push more content through their pipelines. This means revenue and profit opportunities for Adtran.
In Q1, Adtran beat the Street by $0.06, reporting $0.52 per share on a record 30.3% increase in revenue to $165.5 million. Product sales growth of 51% helped the revenue come in ahead of consensus, offsetting seasonal weakness in more traditional product lines. The company saw carrier network sales rise 33% as it gained market share with its optical mobile backhaul products. Enterprise division revenue was up 21% thanks to competitive product wins from CLEC’s. Its broadband access product sales, led by its TA 5000 platform products, were up 42%. And the company expects another revenue record in Q2 as carriers migrate toward IP Ethernet. All these numbers point to robust spending on network upgrades, which is vital to Adtran given with AT&T (NYSE:T), Qwest (NYSE:Q) and Verizon (NYSE:VZ) made up 20%, 18%, and 10% of its revenue, respectively, at year-end.
In AT&T’s earnings report, the company announced wireline spending rose 8% year over year while wirelss capex rose 54% - faster growth than in Q4. Verizon’s spending plans remain on target to match the $16.5 billion it invested last year, however, its spending will be focused more on mobility – which plays into Adtran’s growth product lines. And Centurylink (NYSE:CTL), which acquired Qwest, estimated its capex would be up 16% this year.
The increase in network equipment spending hasn’t been lost on analysts, who are chasing results higher. Adtran has beaten the street in each of the past 4 quarters, prompting analysts to boost 2012 EPS estimates to $2.33 from $2.27 60 days ago.
Another industry development supporting Adtran is the rising prevalence of Internet connected emerging devices. AT&T reported more than 7 million such devices have been added to its network in the past 6 quarters. AT&T’s U-verse and Verizon’s Fios TV subscription growth further fuels spending. Last quarter, subscribers were up 218,000 and 192,000 in the quarter, respectively.
Short sellers remain active too, with 4 days to cover short. Any positive news will add support to share prices as they’re forced to cover. And, the company doesn’t carry a lot of debt, has $460 million in cash and pays a small 0.9% dividend. Gross margins are solid at 59.7% and the company has upside tied to its expansion overseas. International sales rose 85% to $12.4 million in Q1.

As tier 1 carriers invest in equipment to support consumer driven demand, Adtran expects to see high single digit sequential growth this quarter. Investors can benefit from buying shares on sale for upside through yearend.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ADTN, APKT over the next 72 hours.