Earnings Analysis: Adtran Inc.

| About: ADTRAN, Inc. (ADTN)

Adtran Inc. (NASDAQ:ADTN) reported preliminary financial results for the quarter ended 2012-09-30.

Adtran Inc. recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise).

Adtran Inc.'s analysis versus peers uses the following peer-set: Cisco Systems Inc. (NASDAQ:CSCO), Ericsson ADR (NASDAQ:ERIC), Juniper Networks Inc. (NYSE:JNPR), Alcatel-Lucent ADS (ALU), Ciena Corp.(NASDAQ:CIEN), Tellabs Inc.(NASDAQ:TLAB), Sycamore Networks Inc. (NASDAQ:SCMR), Extreme Networks Inc. (NASDAQ:EXTR) and Calix Inc. (NYSE:CALX). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 162.1 184.0 134.7 175.6 192.2
Revenue Growth % (11.9) 36.6 (23.3) (8.6) 4.3
Net Income 9.3 21.1 13.0 31.2 36.2
Net Income Growth % (56.0) 62.6 (58.4) (13.9) (2.0)
Net Margin % 5.7 11.5 9.6 17.7 18.8
ROE % (Annualized) 5.2 11.8 7.4 18.4 21.6
ROA % (Annualized) 4.1 9.6 6.2 15.3 18.0

Valuation Drivers

Adtran Inc. currently trades at a higher Price/Book ratio (1.4) than its peer median (1.2). Adtran Inc.'s operating performance is higher than the median of its chosen peers (ROE of 10.9% compared to the peer median ROE of 4.2%) but the market does not seem to expect higher growth relative to peers (PE of 13.6 compared to peer median of 13.1) but simply to maintain its relatively high rates of return.

The company attempts to achieve high profit margins (currently 11.3% vs. peer median of 3.0%) through differentiated products. It currently operates with peer median asset turns of 0.8x. Adtran Inc.'s net margin is its lowest relative to the last five years and compares to a high of 19.3% in 2011.

Economic Moat

The company's year-on-year change in revenue of 18.5% is better than the peer median but it has not resulted in the same quality of annual earnings growth (21.6% compared to the peer median of 21.9%). This suggests that Adtran Inc.'s current relative cost structure needs to improve to move to a leading position among its peers. Adtran Inc. is currently converting every 1% of change in revenue into 1.2% change in annual reported earnings.

Adtran Inc.'s return on assets is above its peer median both in the current period (8.7% vs. peer median 1.6%) and also over the past five years (16.4% vs. peer median 2.0%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's gross margin of 55.0% is around peer median suggesting that Adtran Inc.'s operations do not benefit from any differentiating pricing advantage. However, Adtran Inc.'s pre-tax margin is more than the peer median (17.0% compared to 1.1%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

While Adtran Inc.'s revenues have grown faster than the peer median (12.7% vs. 5.6% respectively for the past three years), the market gives the stock an about peer median PE ratio of 13.6. This suggests that the market has some questions about the company's long-term strategy.

Adtran Inc.'s annualized rate of change in capital of 20.3% over the past three years is higher than its peer median of 6.9%. This investment has generated an above peer median return on capital of 18.9% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.

Earnings Quality

Adtran Inc. has reported relatively strong net income margin for the last twelve months (11.3% vs. peer median of 3.0%). This margin performance combined with relatively low accruals (4.9% vs. peer median of 9.4%) suggests possible aggressive accounting and an overstatement of its reported net income.

Adtran Inc.'s accruals over the last twelve months are positive suggesting a buildup of reserves. But this level of accruals is less than the peer median -- which suggests that while the company is building reserves, it is doing so in a relatively modest manner compared to its peers.

Trend Charts

Company Profile
ADTRAN, Inc. designs, manufactures, markets and services network access solutions for communications networks. The company operates through two segments: Carrier Network and Enterprise Networks. The Carrier Networks segment provides products and services used by service providers to deliver voice, data and video services to customers' premises and to mobile network cell sites. These products are located in central exchange offices or remote terminals, serving area interconnect locations and cell site locations for mobile networks. The Enterprise Networks segment provides products and services used by enterprise customers to construct voice, data and video networks within the customer's site or among distributed sites. The company was founded in November 1985 and is headquartered in Huntsville, AL.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Communication Equipment, Earnings
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