How Acme Packet Could Rally This Year

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Now that 2011 has passed and 2012 is upon us, it's worth evaluating the stocks you own and are interested in. Should you buy? Sell? Hold? Ignore? Today, we'll put these questions to Acme Packet (NAS: APKT) , a Motley Fool Rule Breakers recommendation that fell more than 40% last year.

Acme Packet's Session Border Controllers, or SBCs, help broker and secure telephone calls made over the Internet. At Rule Breakers, we believe increased use of these devices will lead carriers to more broadly adopt the Internet for telephony while competing with Skype and Vonage (NYS: VG) , among others.

Forecasts for Acme Packet

Median Target Stock Price$35.09
Fiscal 2011 EPS Estimate$1.04
Fiscal 2012 EPS Estimate$1.25
Expected Annual Earnings Growth, Next 5 Years23.1%
Forward P/E26.18
CAPS Rating (out of 5)***

Source: Yahoo! Finance.

How will 2012 go for Acme Packet?
Analysts are expecting below-average growth in 2012. Earnings are expected to improve 20% on a 19.7% increase in revenue. Management's trouble with closing deals could be feeding the skepticism. Roughly 60 different contracts worth $14 million were in process with a better-than-50% chance of closing 10 days before the end of the third quarter. None were signed.

In Q2, Acme Packet suffered a miss when the sales team failed to close a big deal with a carrier most thought to be AT&T (NYS: T) . Management has since confirmed the sale and says both Ma Bell and chief rival Verizon (NYS: VZ) combined accounted for roughly $67 million in revenue last year -- or about 22% of the business. Apparently neither can do without the Acme's technology.

CEO Andy Ory believes the entire industry will follow. Over the long term, he's positioning Acme Packet to provide infrastructure for enabling enhanced services that use Internet Protocol -- the data-encoding language of the Web -- as a reference point. LTE broadband service may be the best-known example.

Both AT&T and Verizon are betting on LTE as a method for allowing customers to transmit vast amounts of data from smartphones, tablets, and other mobile devices. Sprint Nextel (NYS: S) is also working with Clearwire (NAS: CLWR) on an LTE deployment.

Even so, there's no guarantee that an overhaul of the Public Switched Telephone Network, or PSTN, will benefit one company more than another. In the case of Acme Packet, investors will rightly point out that last February's outperformance was a distant memory as of earlier this month.

Yet discounting the stock on the basis of short-term misses also excludes something crucial: Acme didn't lose the AT&T deal, nor are there signs that Q3's pipeline delays will result in lost revenue. Acme Packet may be moving slower than investors would like, but it's still a first mover in an important, emerging market. And that makes it a strong candidate for any tech investor's Watchlist.

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Click here to add Acme Packet to My Watchlist for up-to-the-minute Foolish coverage of the stock and your entire portfolio.

At the time this article was published Fool contributorTim Beyersis a member of theMotley Fool Rule Breakersstock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim'sweb home,portfolio holdings, andFoolish writings, or connect with him onGoogle+or Twitter, where he goes by@milehighfool. You can also get his insightsdelivered directly to your RSS reader.Motley Fool newsletter serviceshave recommended buying shares of Acme Packet. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not 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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