Valuation analysis for ADTRAN, Inc. (NASDAQ:ADTN)

November 17, 2014, 13:24 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

When earnings collapse the period that lies ahead is one of unusually easy comps, but that wears off fast, and if EPS growth does not continue multiple contractions can come.

ADTRAN, Inc. (NASDAQ:ADTN) has had trouble growing earnings; in the past earnings growth has been abysmal, but recently the company has managed to stabilize the deterioration in earnings and earnings growth has been realized.  That is a relatively positive sign, but it is not yet confirmation.

Our evaluation of earnings growth focuses on earnings from operations by excluding onetime events, and we compare trailing 12 month data on an annualized basis to determine the earnings growth rate accordingly.  This also discounts seasonal anomalies.  Our earnings growth observations shows us that earnings growth began to crater lake in 2011 and by the end of 2012 earnings growth for ADTRAN reached a low.  Since then, earnings growth has been recovering, but not impressively so.

Furthermore, it is concerning that the earnings growth rate, which initially accelerated from very easy comps, has since fallen back.  That brings valuation concerns into the picture, and with a PE multiple of almost 19 times earnings a growth rate like the one we're with his to for ADTRAN makes investors who are interested in value question the relative value of the company at this time.  The PEG ratio for ADTN is about 3 at this time, and forward estimates do not suggest much improvement.

Technical take:

According to our real time trading report for ADTRAN the stock has tested longer-term resistance and it is in the process of declining towards longer term support.  We would not be buyers of the stock accordingly, and we would expect the stock to continue to decline from current levels until longer term support is tested again.  Longer term support, however, is not significantly far away from current levels and therefore buy signals may surface again soon if the stock continues to fall, but longer term support would also act as our risk control and if the stock broke below longer term support we would exit the trade and not look back.

Summary:

ADTRAN has had trouble growing, but earnings growth did stabilize.  The problem is, after the easy comps that existed on the heels of the earnings growth trough, earnings growth is much closer to the flat line again.  Given the relatively rich multiple, one usually levied on companies that are growing nicely, the PE multiple of almost 19 times earnings makes ADTRAN look rich.  Furthermore, our technical observations tell us to avoid the stock unless it tests longer term support, which it appears to be likely to do relatively soon, but support should also be treated as a risk control mechanism and stop losses be associated with that specifically.  If ADTRAN fails to grow more meaningfully multiple contractions can come and if it breaks support that may be a telling sign of what lies ahead.

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