Summary
- ADTRAN's fiber business continues to lead the company's performance.
- It has experienced extreme volatility since July 1; the next earnings numbers will determine whether or not that will continue.
- A preliminary earnings report points to the company probably exceeding expectations in the reporting period.
- If its European metro optical business performs well going forward, the company could experience sustainable growth over the next couple of years. If not, the stock will remain flat and choppy.
For long-term shareholders of ADTRAN Holdings ( ADTN ) it has to be a frustrating experience as they watch the share price of the company move in wild ups and downs, but never able to sustainably break out.
After hitting $27 per share in December 2013, it has never returned to that level, although if its next earnings report deliveries on recent promises, the company may once against test it.
In this article we'll look at some of the numbers from the preliminary earnings report it released, and what some of the catalysts may be that finally allow the company to breach the $27 per share mark for the first time in about 9 years.
Share price over the last year
Over the last year, ADTRAN has traded from a 52-week low of $16.30 to a 52-week high of $25.47. On July 1 it was trading at a low of $17.45, and a month later, on August 1, it soared to just under $25 per share. On August 19 it reached its 52-week high before cratering to approximately $17.50 before it started another run to over $23 per share, before dropping to under $19 per share.
The reason I'm providing this play-by-play action of the stock is because after that last pullback the company decided to release its preliminary earnings report, which was a positive one. I think the purpose there was to stop the share price from collapsing to levels that even a good report wouldn't be enough to provide decent support.
Going back a year, after all the volatility, the share price of ADTN is only about $1 above where it was a year ago, and that's after the release of the report.
Preliminary earnings report
In the preliminary report for Q3 , revenue was $340.7 million, over $10 million from the Street consensus of $330.47 million.
Adjusted operating income jumped to $20.9 million against the adjusted operating loss of $2.6 million in Q3 2021, while also beating the $16.9 million consensus of the Street.
Gross margin in Q3 was 28.8 percent, with adjusted gross margin of 38.1 percent. ADTRAN CEO Tom Stanton said the addition of ADVA resulted in strong demand which that is projected to "exceed market expectations."
Preliminary operating expenses for the quarter are $142.1 million, with non?GAAP operating expenses of $109.0 million, and a GAAP operating loss of $61.1 million
The next earnings report is scheduled for November 7, after the market closes.
My thought here is it's a no-brainer to make an acquisition and the numbers to improve. What's important for investors is to find out how much of that will be organic growth in the future.
What's driving sales
While ADTN didn't comment on specifics, there can be little doubt that sales continue to be led by the company's fiber access business in the U.S. Demand in the European broadband segment should also be confirmed to be strong in the upcoming earnings report.
As for the results from the metro optical business in the European market, that is probably going to face some headwinds, but not to any significant level, in my opinion.
Another potential positive catalyst is the likelihood supply chain issues are improving, so gross margin could improve in 2023.
ADTRAN, which provides end-to-end fiber networking solutions in various countries around the world, does most of its business in the U.S. and Germany. For now, those are the major markets to research when taking a look at the company; that's where most the sales are going to come from.
Conclusion
I'm not really feeling the love here for ADTRAN. Yes, its acquisition is helping improve the numbers, and the preliminary earnings report, I believe, based upon the past share price volatility over the last couple of decades, was released in order to prevent the share price from collapsing to levels that would take significant time to recover from, even if with a more positive report.
Assuming that was the strategy of ADTN, it worked some, but it's still far below its 52-week high, and not much above where it traded a year ago.
If the actual earnings report confirms the numbers, and if organic growth isn't happening in any meaningful way, I'm not sure what catalyst could drive the share price sustainably higher, to the point of breaking out of its long doldrums that have left long-term shareholders with nothing much to celebrate.
After breaking out from $5.00 per share on March 15, 2020, and making a nice run to about $24.50 in August 2023, it has traded choppy and flat. I don't see anything at this time that would justify thinking there is a catalyst out there that could return it to a high-growth situation.
To get a real feel for how the stock has traded, I recommend looking at the last 20 years to see that it has done nothing but trade in a volatile and flat range; it never has been able to sustainably break out.
That doesn't mean there isn't money to be made, because there is if you're patient and wait for the big corrections the company has historically made, along with the temporary but predictable jump in its share price. Just don't think in terms of buying and holding for prolonged periods of time. There's a long enough record of its performance that confirms it hasn't been able to sustainably break out. Take your profits and run with this volatile stock.
For further details see:
Adtran Holdings Still Struggles To Find Sustainable Growth