by Jamie Dlugosch | October 11, 2011 10:00 am
Telecommunication company Adtran (NASDAQ:ADTN) reports earnings for the quarter ending Sept. 30 on Wednesday. In a sea of uncertainty, investors are likely to be impressed by Adtran’s earnings, which are likely to beat analyst expectations.
In such a difficult environment, stocks like Adtran deserve a premium valuation. Thus far the company has given little indication that its business conditions are deteriorating. That might change this quarter, as management has every right to become conservative. That said, if performance continues to beat expectations, shares should rally after Wednesday’s report.
During the past four quarters, Adtran has beaten average Wall Street estimates:
It should be noted that the size of the beat in the quarter ending June 30 was Adtran’s lowest during the past year. Investors should not be concerned, however, as estimates have been progressively marching higher. For the quarter ending Sept. 30, the average Wall Street estimate for profits is 56 cents per share; 90 days ago, the estimate was at 55 cents per share.
The full-year estimate is higher than it was 90 days ago, too. Currently the company is expected to make $2.18 per share. In 2012, profits are expected to grow by 8% to $2.35 per share. Based on consensus estimates, Adtran is on pace to grow earnings by 23% this year.
Click to EnlargeDespite the strong performance against expectations, shares of Adtran have been on the decline with the rest of the market. The stock is down 6% during the past 12 months.
On the surface, it would seem that Adtran is incredibly undervalued at the moment. The stock is down over the past 12 months. At the same time, the company has exceeded average Wall Street estimates by a wide margin. The stock trades for 13 times forward earnings, suggesting this is one of those instances where trading in the stock is simply correlated to a market in decline.
Digging deeper, though, there is legitimate cause for concern. Looking forward, Adtran is expected to grow profits by only 8% in 2012. That is not a bad growth number, but it is hardly robust. Given that reduction in earnings growth, a 13 multiple might be a bit rich.
When Adtran reports earnings, it is likely to beat slightly higher expectations based on its recent track record against estimates. The concern will be its performance in the future. Still, the current expectation for growth appears appropriately reduced, which puts the likelihood of reduced guidance on the low end of the scale.
At the end of the day, Adtran’s stock is neither too hot nor too cold. It is priced about where it should be given the circumstances. I do not expect shares to move one way or another after it reports earnings Wednesday.
As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.
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