Why Adtran's Earnings Were in Line

Adtran Inc. (Nasdaq: ADTN) reported earnings last week that met analyst expectations, but one analyst argues it happened partly because of Adtran's bond investments.

Adtran's 56 cents-per-share profit for its third quarter, which ended Sept. 30, included about 4 cents per share of "other income" -- mostly from long-term investments such as bonds -- according to Simon Leopold of Morgan Keegan & Company Inc.

Those 4 cents equate to about 9 percent of pre-tax income -- a normal amount for Adtran's "other income" during the past two years. But in in a note published Monday morning, Leopold also points out a change to Adtran's long-term investments: "Two years ago, an overwhelming portion of Adtran's long term investment portfolio was in securities rated AAA, the highest quality rating. Since then, we have seen a shift to lower quality, higher risk securities in a quest for yield."

As of June, about $201 million of Adtran's $372 million in long-term investments were in corporate bonds rated A and BBB, as opposed to the AAA-rated securities Adtran used to favor, Leopold writes.

Why this matters
Adtran has been on a roll, enough to repeat as a Leading Lights finalist for Public Company of the Year. But its success with bond investments, particularly when interest rates are as buoyant as an SUV, could be precarious. "In our view, the quality of earnings has deteriorated and investors should keep a close eye on this portfolio as adverse macro-economic conditions could result in losses," Leopold writes.

For more
Some of the latest on Adtran's doings:

— Craig Matsumoto, West Coast Editor, Light Reading

paolo.franzoi 12/5/2012 | 4:51:07 PM
re: Why Adtran's Earnings Were in Line

Do you know if there are tax breaks for municipals for corporations like their are for individuals?  It might explain why the change in grade is so significant.




Pete Baldwin 12/5/2012 | 4:51:07 PM
re: Why Adtran's Earnings Were in Line

The corporate-bond investment strategy seems deliberate, and it's interesting to contrast with the focus two years ago. Going back to the March 2009 10-Q,* Adtran's investments included about $150M in municipal bonds, all AAA-rated, and $25M in corporate bonds at AAA or AA.

That compares with $200M in corporate bonds as of June 2011, with 55% of those rated A and 30% BBB.

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