By Matt Doiron
Insider transactions are rare at Adtran (ADTN), a $1.4 billion market cap technology company which provides voice, video, and data communications products, but William Marks (a director of the company) recently filed with the SEC to state that his IRA had purchased 8,600 shares at an average price of about $21.94. The company's stock currently trades at about $21.50, falling about 23% in the last week after earnings fell 43% in its quarterly results and it was hit by a string of downgrades. Before that major event it was slightly down for the year. Mr. Marks apparently believes that the market has overreacted to Adtran's recent performance and that the stock is a buy below $22. Investors may want to consider his opinion and potentially get in at an even lower price, as corporate insiders often have more information about a business's current and future prospects.
Given the buying by an insider, it is worth taking some time to review Adtran's most recent quarter. The company's 8-K reported revenue that was flat compared with the second quarter of 2011, at $184 million, but margins decayed and caused the 43% fall in net income. This follows another weak performance in the first quarter of the year. Considering both quarters together, revenue is down about 9% and net income is down about 52% compared with the first half of 2011. The decrease in margins is coming about because Adtran has increased both administrative expenses and R&D as revenue has fallen. Adtran does still have a stable current ratio of 4.
ADTN is not a common stock among hedge funds, though it can be found in a few portfolios. Royce and Associates, managed by Chuck Royce, owned 5.8 million shares at the end of March (see what else was in Royce's portfolio). Royce has been a major holder of the stock at least since 2010. Joel Greenblatt, a value investor with a focus on technology and services, more than doubled Gotham Asset Management's position in ADTN in the first quarter of the year to over 100,000 shares. He had initiated this position in the summer of 2011 and had been increasing it since that time (check out Greenblatt's Magic Formula stock picks).
Adtran's trailing and forward P/E ratios are between 13.5 and 14, which compare somewhat unfavorably with its peers. Alcatel-Lucent (ALU) has a forward P/E of about 6 as its earnings are expected to decrease in the future; its trailing P/E is 2. The PEG ratio, which controls for the long-term trend in earnings, is 1 compared with Adtran's 1.5. Two other peers are Cisco (CSCO) and Qualcomm (QCOM), which have trailing P/E ratios of 12 and 16 respectively. CSCO and QCOMM have much larger market caps, have significant growth expectations from analysts that bring their forward P/Es below ADTN's, and are also among the top 10 tech stocks among hedge funds. Adtran cannot be considered a value stock on the basis of its EBITDA multiple either, with its stock price implying an enterprise value of over 8x trailing EBITDA. ADTN pays a dividend, but it is fairly small with a yield of 1.7% at current prices. Since the stock price used to be considerably higher, that 1.7% rate is likely not the company's target level of dividend payouts and the dividend could be cut in the future if corporate performance continues to be poor.
Overall, we would wait for additional insider purchases before considering a new position in Adtran.