Flying Under the Radar for Value

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I want to talk about a company that garners very little attention from the general business press. It's one of those unpretentious firms that goes about its business quietly, competently, and efficiently.

It is a company whose:

  • Return on invested capital is 21.7% for the trailing 12 months, and with a ROIC of not less than 14.2% since 2004.
  • Revenues have increased by 26% for the first six months of this year over the same period in 2010.
  • Operating income has increased 52% over those same six months.
  • Net profit margin has increased 18% over that period.

The company in question is ADTRAN (NAS: ADTN) , a builder of equipment that carries information on that "last mile" of a communications network. It's also a company that will play a vital role in the potential success of another company that does get some attention, Frontier Communications (NYS: FTR) , a favorite among high-yield dividend investors.

Now that you bought it, what do you do with it?
Frontier made news in 2010 when it acquired 14 states' worth of land-line telephone operations from Verizon Communication (NYS: VZ) . The conventional wisdom back then was that Frontier -- up to then a provider of phone service to small communities -- bit off more than it could swallow in the $8.6 billion deal that tripled its size.

Verizon, it turns out, had neglected its operations in those states, which caused the "Can You Hear Me Now?" carrier to quickly lose customers, only 60% of whom had access to broadband services, compared to the 92% of Frontier customers who did.

Whom do you call?
It seems that Frontier had bought a fixer-upper, and it needed to roll up its sleeves and do the things that needed to be done to get those customers back. One of those things was to modernize the old Verizon networks.

For this, Frontier brought in ADTRAN for a makeover of its newly acquired infrastructure. This past July, it awarded ADTRAN a three-year contract to bring high-speed Internet service to at least 85% of the customers it acquired from Verizon. Frontier can't afford any slip-ups here because it must gain, not lose, to meet its debt obligations and keep its dividend-loving investors satisfied. ADTRAN may be the perfectly positioned company to take on this task. It has a reputation for providing low-cost equipment with superior customer service.

Bottom line
As an investment, though, ADTRAN does bring one particular concern: Almost half of its 2010 revenues came from just three customers -- AT&T (NYS: T) , Qwest (now merged with CenturyLink (NYS: CTL) ), and Verizon. This concentration of revenues could be worrisome, but ADTRAN is mitigating concerns by increasing its market share with the many small and medium-sized carriers that dot the country, as well as by increasing its overseas telecom business. Its enterprise business has also grown by 40% in the past few years.

The earlier caveat aside, I think this is a good company to invest in (it even brings a 1.4% yield with it), and I'm going to put my CAPS score where my mouth is and give it a thumbs-up. If you're not yet a member of CAPS, sign up for free to take advantage of the investing experience the community brings.

At the time this article was published Fool contributorDan Radovskyowns shares of AT&T and Frontier Communications.Motley Fool newsletter serviceshave recommended buying shares of AT&T. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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