Tuesday Winners: Tellabs Brings the Focus to Telecom Stocks

It’s been an extended stretch of misery for companies that supply equipment to wireless and wireline telecom companies. The massive network buildout of the 1990s led to more tepid capital spending in the last decade. But we may be entering a robust new phase of industry spending, according to telco equipment supplier Tellabs (Nasdaq: TLAB). The company this morning posted first-quarter results ahead of analyst forecasts, and also issued impressive second-quarter guidance. That helped push shares up nearly +10% in Tuesday trading. (In late February we looked at Tellabs’ prospects here.)

Shares of Tellabs have risen more than +50% since the start of the year, but it’s not too late to join the party. That’s because the renaissance in telecom equipment spending is just getting underway, which should yield steady sales gains for Tellabs in the years to come. And thanks to robust cost cuts over the last two years, profits may grow at a very fast clip. If you exclude the company’s hefty $1.1 billion cash position, the Tellabs is valued at just $2.4 billion, or roughly 10 times the current run rate of annual cash flow. And as noted above, that cash flow looks set to rise at a solid clip over the next few years.

Tellabs’ key rival Adtran (Nasdaq: ADTN) posted similarly robust results earlier this month, echoing the bright industry outlook. Could investors be in for a similar treat when competitor ADC Telecom (Nasdaq: ADCT) weighs in late next week? Options investors think so, as call buying on ADC Telecom has ticked up recently.

“Thanks for nothing.” That seems to be the message investors are sending to Western Union’s (NYSE: WU) CEO Christina Gold. Her retirement announcement sent shares up nearly 9% in Tuesday trading. Western Union’s quarterly results were uninspiring, but the money transfer firm should see improving results if the global economy continues to get back on its feet. And shares, at about 13 times next year’s projected profits, are reasonably priced for a company with a global footprint and strong brand name. To move shares higher from here, new management will need to articulate growth plans that help boost sales.

Lastly, chip stocks continue to move back into vogue on the heels of stellar results from Cirrus Logic (Nasdaq: CRUS) and Cavium Networks (Nasdaq: CAVM). Those stocks are up +15%, and +9%, respectively, in Tuesday morning trading. We recently highlighted Applied Materials (Nasdaq: AMAT) as an undervalued play on the industry’s renewed growth prospects. Click here to see the story.