Adtran: Uncertainty About Future Valuation Continues To Depress Valuation

| About: ADTRAN, Inc. (ADTN)

Shares of network and communication provider Adtran (ADTN) rose 8% in today's trading session after reporting its first quarter results.

First Quarter Results

Adtran reported first quarter earnings per share of $0.20, in line with expectations, but below the $0.55 the company reported last year. Expansion plans and acquisition expenses impacted first quarter earnings which came in at $13 million on revenue of $134.7 million which was down 19% on the year. The disappointing results do not come as a surprise as the company issued a sour outlook already last month.

As discussed above, earnings were impacted by pre-tax acquisition costs of $2 million, which includes stock-based compensation expenses, related to the acquisition of Bluesocket and the planned acquisition of Nokia Siemens' Broadband Access business.

Revenue came under pressure as major carriers including Verizon (VZ) and AT&T (T) cut back on infrastructure spending. "Although the quarter did not meet our initial expectations, we believe the issues relate to timing, not market positioning," said Chief Executive Tom Stanton.


Adtran ended the first quarter with $37 million in cash and equivalents while it had debt outstanding of $47 million. After today's spike the market values the company at some $2 billion. This valuation implies a 2.8 times annual revenue multiple and 14 times 2011's earnings. These seem rather reasonable valuations given the fast growth of the company and high margins.

However shares already trade 30% lower from their high of $47 in the beginning of 2011 as the growth pace is slowing down. The suggestion that the 19% decline in first quarter revenue is largely due to delayed orders gives investors hope that the performance for the entire year of 2012 will not be as bad as it looks at the moment. Acquisition related expenses impacted net margins which came in at 10%

Despite the decline in first quarter profitability the board maintains its quarterly dividend of $0.09 for an annual dividend yield of 1.2%

Investment Thesis

Adtran will reignite future growth with the two recent acquisitions of both Bluesocket and the broadband assets of Nokia Siemens which will significantly boost the size of its business but also increase integration risk as these are sizable acquisitions. Furthermore the margin impact is largely unknown.

Both acquisitions could drive up the future valuation of the company, however execution risks and unknown sustainable margin levels will determine the actual value in the future. These are large uncertainties and until there is more known about this future trajectory I remain on the sidelines, realizing the possibility that I coudl miss out on a possible strong recovery.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.