CommScope Selloff Is Opportunity in Light of Revised Guidance

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CommScope Holding Co. Inc. (NASDAQ:COMM) caught my eye on Tuesday as it traded down 5 percent. Should you take advantage of this selloff? The company itself provides connectivity and infrastructure solutions for wireless, business enterprise, and residential broadband networks worldwide. The company operates through three segments: Wireless, Enterprise, and Broadband.

The Wireless segment offers macro cell site solutions, including base station antennas, microwave antennas, hybrid fiber-feeder and power cables, coaxial cables, connectors, amplifiers, filters, backup power solutions and small cell DAS solutions comprising distributed antenna systems that allow wireless operators to enhance spectral efficiency, and cellular coverage and capacity in network conditions, such as commercial buildings, urban areas, stadiums, and transportation systems. It provides its solutions primarily under the Andrew brand.

The Enterprise segment offers voice, video, data, and converged solutions consisting of optical fiber and twisted pair structured cable solutions, intelligent infrastructure software, network rack and cabinet enclosures, intelligent building sensors, and LED lighting control systems, as well as network design services under the SYSTIMAX and Uniprise brands. Its solutions support high-bandwidth applications, including storage area networks, streaming media, data backhaul, cloud applications, and grid computing. This segment also provides iTRACS, a data center infrastructure management software.

The Broadband segment offers cable and communications products that support the multichannel video, voice, and high-speed data services. It serves wireless operators as well as enterprise customers. The stock is being punished, but I think you can take advantage of the selloff given some recent news out of the company.

One primary reason to consider this company is that it has raised its sales and earnings guidance for the second quarter of 2014. While there will continue to be volatility in carrier spending patterns, its wireless business has performed well. Wireless operators are investing in its industry-leading macro cell site and small cell distributed antenna system (DAS) solutions to improve network coverage and capacity. It is also seeing continued growth in its Enterprise segment and improving profitability in its Broadband segment.

In terms of its earnings, CommScope management provided the following second-quarter and full-year 2014 guidance, which assumes stable business conditions and excludes the amortization of purchased intangibles, restructuring charges, costs associated with the recent debt transaction, and other special items. For the second quarter, it now sees sales of $1.025 billion to $1.05 billion, up 10 percent year over year at the midpoint of the range. Further, it sees adjusted operating income of $235 million to $245 million, up 30 percent year over year at the midpoint of the range. Finally it sees adjusted earnings per diluted share of 63 cents to 66 cents, up 11 percent year over year at the midpoint of the range, reflecting the higher year-over-year share count.

For the year, the company expects sales growth to moderate in the second half of the year as North American wireless operator spending patterns appear to be weighted more to the first half of the year. The company reaffirmed its calendar year 2014 guidance, for which it anticipates sales growth in the high single digits to low double digits. It sees adjusted operating margin expansion along with adjusted effective tax rate trending toward a long-term target of 35 percent to 37 percent. Finally, it sees significant adjusted net income and adjusted earnings per share growth, as well as strong free cash flow.

Disclosure: Christopher F. Davis holds no position in CommScope Holding Co. and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $28 price target.

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