Here's Why Goldman Upgraded Adtran Despite Near-Term Risks

Shares of ADTRAN, Inc. (NASDAQ: ADTN), a small-cap provider of networking and communications equipment, have lost more than 15 percent over the past three months. While the stock has a "heightened degree of uncertainty" and more near-term downside, according to Goldman Sachs, the firm dropped its bearish stance on the stock Tuesday.

The Analyst

Goldman Sachs' Doug Clark upgraded Adtran's stock rating from Sell to Neutral with an unchanged $17 price target.

The Thesis

One of the biggest overhangs to Adtran's stock comes from its key customer Centurylink Inc (NYSE: CTL) putting its business with Adtran on hold as it conducts a 60-to-90 day review, Clark said in the upgrade note. (See the analyst's track record here.) 

CenturyLink accounts for around 25 to 30 percent of Adtran's total sales, and it is possible that CenturyLink will resume its multiyear vectoring upgrades, which represent around $35 million in quarterly revenue for Adtran, Clark said. 

Major telecom companies like AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) could once again become major customers, the analyst said. AT&T started to deploy its G.fast equipment from Adtran in out of-region locations, and Adtran could see an expansion to in-region G.fast deployments in mid-2018, according to Goldman. And Adtran is engaged in trials with Verizon for its NG-PON2 technology, which could see early deployment this year.

Despite the uncertainty with a key customer, a combination of potential new customer gains from AT&T, Verizon and others creates a "more balanced risk-reward" profile for Adtran, Clark said. 

Price Action

Shares of Adtran were trading down slightly at $19.68 late in Tuesday's trading session. 

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