ADC Telecommunications: connecting the Internet

The efficiency of high-speed Internet service depends critically on the reliability of its infrastructure components. An Eden Prairie, Minnesota firm is acknowledged as a leading manufacturer of the needed equipment, by virtue of serving big name clients in over 140 countries.

ADC Telecommunications (NASDAQ:ADCT) provides infrastructure equipment used by wireline, wireless, cable, broadcast and enterprise networks. Its systems connect high-speed Internet, data, video and voice services to residential, business and mobile subscribers. The firm also provides network management software and integration services. Among the company's customers are the Bank of England, Bloomberg, Morgan Stanley (NYSE:MS) and Verizon Communications (NYSE:VZ).

The firm surprised the Street last week, when it reported fiscal Q1 EPS of fourteen cents (ex-items) and revenues of $297.2 million. Analysts had been looking for six cents and $262.4 million. Gross margins improved to 32.0 percent, from 30.2 percent in the fourth quarter of 2006. Management also guided FY07 EPS to 81-91 cents (83 cent consensus) and FY07 revenues to $1.260-$1.290 billion ($1.27 billion consensus). The stock popped on the news and has since been defining a bullish "pennant" consolidation pattern. Stocks frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the issue with five "strong buys" and seventeen "holds." Analysts see a 21% growth rate through the next year. The stock's P/E ratio (18.59), Price to Sales ratio (1.46), Price to Book ratio (2.17), Price to Cash Flow ratio (9.59), Price to Free Cash Flow ratio (21.62) and EPS Growth rate (819.39%) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 77% of the outstanding shares. The stock is one of those used to calculate the S&P 500 Index. Over the past 52 weeks, it has traded between $11.81 and $26.76. A stop-loss of $14.25 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.