We are downgrading our recommendation on ADTRAN Inc. (ADTN), a global provider of networking and communications equipment, to Neutral from Outperform on valuation concerns. We are at present forced to remain on the sidelines as ADTRAN shares reached our target price of $44.00 and then dipped below that level.
We believe that competitive threats, stringent regulatory environment and customer concentration may limit the company’s growth. ADTRAN derives the majority of revenues from its major customers such as AT&T Inc. (T), Qwest Communications (Q) and Verizon Communications Inc (VZ). Customer concentration remains a deep concern, particularly at Qwest as the Qwest–CenturyLink Inc. (CTL) merger could hurt the company’s overall revenue.
Although the above-mentioned merger might result in loss of market share, we believe that ADTRAN’s long-term prospects remain unblemished. ADTRAN’s three growth products, Broadband Access, Optical Access and Internetworking products, are constantly delivering record revenues and are expected to continue doing so in the future. These three growth products reached an all-time high, which led to record breaking revenues in the fourth quarter.
In the recently concluded quarter, adjusted earnings surpassed the Zacks Consensus Estimate as well as the year-ago figure. Strong demand for high speed connectivity and Ethernet services drove the quarter’s performance.
We believe ADTRAN is well positioned for strong growth in 2011 driven by mobile backhaul demand, TA 5000 rollouts, fiber to the node, Ethernet over copper, market share gains, new product offerings, continued internetworking momentum, strong international ramp, and growing service revenue. Additionally, ADTRAN has a strong balance sheet with no long-term debt and is committed to return value to shareholders through dividend payouts.
For the short term (1-3 months), ADTRAN retains a Buy rating with the Zacks # 2 Rank.
ADTRAN INC (ADTN): Free Stock Analysis Report
CENTURYTEL INC (CTL): Free Stock Analysis Report
QWEST COMM INTL (Q): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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