ADC Telecom a Buy On Valuation

by: Zacks.com September 08, 2008 | about stocks: ADCT    

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ADC Telecommunications (ADCT) declared third fiscal 2008 financial results below our estimates. The company’s business was impacted by general macroeconomic weakness that resulted in restricted capital spending on the part of telecom service providers and original equipment manufacturers.

According to our assessment, the long-run business fundamentals remain intact for ADCT as increasing demand for video streaming and larger investments by enterprise customers for high-density data centers are expected to foster telecom carrier implementations for high-speed wireless and FTTX networking.

Deployment of fiber based networks continues to grow as a result of massive demand for greater bandwidth. Telecom service providers are likely to increase, or at least proportionate, capital expenditures for fiber connectivity following two years of ongoing industry consolidation.

The company’s ongoing restructuring is expected to result in meaningful cost savings over the next two years. While international business for the company accounted for 44% of its total third quarter 2008 sales, wireless coverage capacity solutions remain significant growth opportunities for the company.  Acquisitions of LGC Wireless and Century Man improved the company’s financials.

ADCT is trading at 7.9x our estimated fiscal 2009 forward earnings, which represents a significant discount to both the forward P/E ratio for the industry group and the S&P 500 average. With respect to other selected valuation metrics, the stock is also trading below its peers. However, near-term earnings fluctuations may continue due to general macroeconomic uncertainties. We maintain our Buy rating with a six-month target price of $18 based on 15.5x P/E using our fiscal 2009 earnings estimates, at par with the peer average.

Nalak Das contributed to the report.

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This article has 1 comment:

  •  
    Sep 08 11:03 AM
    100% upside in this environment is too bullish. The carriers are consolidating and that is hurting pricing, and subsequently, margins. But there is def a case for a 20-30% move from here as the stock is just too cheap.
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