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We are upgrading our recommendation on ADTRAN Inc. (ADTN - Analyst Report) to Outperform ahead of its second quarter of 2013 financial results, which will be released tomorrow before the opening bell.

Why the Upgrade?

ADTRAN continues to perform creditably despite a challenging business environment. The company is facing double-edged problems: (1) the communications equipment industry is currently going through a volatile phase due to uneven capital spending of telecom carriers and (2) increasing competitive pressure within the industry.

In the last reported quarter, ADTRAN stabilized its businesses with the U.S. Tier 1 carriers, while generating contracts from several Tier 2 carriers. The Enterprise division also complemented the effort with strong sales of IP gateway and switch products.

Looking ahead, we expect the company to benefit from market share gain, new product offerings, solid international sales and growing service revenues. We believe that free cash flow will also remain steady in the near future.   

Apart from these, the company has also registered significant growth in its professional service activities that deploy the Total Access System components in telecommunication companies. The company has projected that professional services capabilities will remain accretive as both domestic and international carriers seek cost-effective methods to accelerate network deployments.

ADTRAN is also moving into virtual wireless LAN solutions with the buyout of Bluesocket, a privately held U.S. company that specializes in wireless network solutions with virtual control system.

Other Stocks to Consider

ADTRAN currently has a Zacks Rank #2 (Buy). Apart from ADTRAN, other stocks in the industry which are also performing well include Calix Inc. (CALX - Snapshot Report), Crown Castle International Corp. (CCI - Analyst Report) and Equinix Inc. (EQIX - Analyst Report). All these stocks currently carry a Zacks Rank #2 (Buy).

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