Skip to main content

Cutting Sonus' Price Target, and a Reminder on CalAtlantic Homes

Sonus Networks posted less disappointed than expected earnings.
  • Author:
  • Publish date:
Comments

We are cutting our price target on Sonus Networks (SONS: Nasdaq) to $8.50 from $12 after yesterday's earnings report, despite the shares' stellar rise after it posted less disappointing results.

Yesterday Sonus Networks reported better-than-expected first-quarter revenue and earnings, as well as reaffirmed its 2017 guidance, which led to the shares popping more than 16% higher. Revenue for the quarter came in at $53.4 million compared to the guided revenue of $52 million, and we'd be remiss if we didn't point out that despite the revenue beat, year over year it still fell just under 10%. Fueling the incremental revenue in the quarter, Sonus noted the increasing pain point that is vexing its customer base, which includes Verizon (VZ) and AT&T (T) : attacks on VoIP services. IBM (IBM) began tracking attacks in SIP about two years ago and has noted a six-fold increase in that time.

Paired with better-than-expected margins, the company's bottom line came in at a loss of -$0.09 per share, which was well ahead of the consensus expectation of -$0.13 per share. Similar to our revenue commentary, EPS in the March quarter compare to $0.13 per share in the year-ago quarter.

Aside from the-better-than expected results, the company noted its book-to-bill ratio topped 1.0 for the third consecutive quarter. On the earnings, call management commented they see that happening once again in the current quarter. That ratio led management to boost their revenue forecast for the current quarter by $2 million, but even after that bump higher revenue for the quarter will still be down nearly 10% year over year.

Looking at the company's 2017 guidance, it continues to forecast it flat to up low single digits vs. 2016, which implies revenue in the range of $252-$262 million. Based on the $107 million guided to on yesterday's call, it means Sonus needs to grow its revenue more than 35% compared to the first half of the year to hit the low end of that target range. Color us a tad skeptical, but that appears to be an aggressive forecast, especially when we consider the pace at which revenue has been falling in the first half of the year.

While we understand the investments that AT&T, Verizon and others are making in their networks, we'll be trimming the existing above-average price target of $12 to $8.50, which equates to just under 33x expected 2018 EPS expectations of $0.26. We've seen this several times before -- the transition to positive EPS generator from bottom line less adds enables investors to utilize P/E and PEG valuation metrics, which can paint a different valuation picture. We see that happening once again with Sonus shares, hence our price target revision.

Based on that revised price target, we see just over 8% upside to our revised price target, which reinforces our Two rating on SONS shares. Given the nature of a Two rating, we'd be inclined to scale into the shares below $7.40 on signs the company was closing the gap on second-half 2017 revenue expectations.

As a quick reminder, we have CalAtlantic Homes (CAA) reporting earnings tomorrow morning with an 11 AM ET earnings conference call. Expectations call for this homebuilder to deliver EPS of $0.55 on revenue of $1.27 billion for the first quarter of 2017, and guide to EPS of $0.89 on revenue of $1.7 billion for the current quarter. As we shared in recent Roundups, CAA shares are clearly not a stock under $10. We're inclined to use any upside surprise in the company's quarterly report to exit this position on strength, much the way we recently did with Synovus.

Given the strength in March new home sales reported by the Census Bureau earlier this week -- up 5.8% month over month to 621,000 homes, an eight-month high -- there is a distinct probability CalAtlantic could surprise to the upside. If not, and the company delivers a softer than expected outlook, we'd look to exit the shares and limit losses as we exit this stock that is not under $10.

ADDITIONAL INFORMATION
For current insights go to Actions & Analysis.
Don't miss out on the Weekly Roundups.
View the Portfolio
Get the additional market insights with our Bonus Reports.

YOUR ACCOUNT
To manage your account, click here.

GO MOBILE
Get Stock Under $10 on your smartphone.
For iPhone, click here.
For Android, click here.

Please remember that Stock Under $10 is not intended to provide personalized investment advice. DO NOT EMAIL THE SU10 TEAM SEEKING PERSONALIZED INVESTMENT ADVICE, WHICH HE CANNOT PROVIDE.