Friday, June 24, 2011

Is Acme Packet Too Pricey?

Since its Oct. 2006 IPO, Acme Packet (NASDAQ: APKT) has risen from $17 to as high as $75.69 last month -- that's a nice 37% compound annual growth rate for shares of this maker of communications gear. In the last month, this high flyer's stock fallen 10% -- is that a buy signal?

Acme Packet makes equipment that helps people communicate. More specifically, its so-called session border controllers (SBCs) let groups of people in different locations conduct voice and video communications sessions across their networks. Acme Packets' customers include service providers, enterprises, government agencies and contact centers.

Acme Packet has made a good living making and selling SBCs. In the last five years, its sales have grown at a 45% average annual rate to $254 million leading to a $4.9 billion market capitalization. And it in the last 12 months it earned $48 million profit -- a solid 19% net margin.

Not only that, but Acme Packet is generating cash with a secure balance sheet. It has no long-term debt and its cash has grown at a 17.9% annual rate from $119 million in 2006 to $271 million in 2010.

Acme Packet is a leader in a fast growing market. According to Exact Ventures, the enterprise SBC market grew 55% in the year ending March 2011. This growth is a result of organizations buying new SBC technologies -- specifically so-called SIP trunk and hosted unified communications (UC) services.

Acme Packet leads in two big segments -- companies and communications service providers. Cisco Systems (NASDAQ: CSCO) is in second place, followed by some smaller competitors. However, since the industry remains fragmented -- with 20 competitors -- price competition is intense.

In the first quarter of 2011, Acme Packet delivered strong performance that was below Wall Street expectations. Its revenues rose 44.9% to $74 million and its net income was up 65.1% to $13.7 million. But its 19 cents a share EPS was 24% short of the 25 cents mean analyst EPS estimate.

Acme Packet remains confident of its future. After all, in June it signed a lease to boost its Bedford, Mass.-headquarters space -- where it does research and development, final test and assembly -- by 75% to 262,000 square feet. 443 of its 679 employees work there. And Acme Packet has already hired 70 workers and plans to add 117 more by the end of 2011.

But is Acme Packet boosting its return on capital? In a nutshell, yes. After all, it's producing positive EVA Momentum (essentially, growth in profit after deducting capital costs divided by sales), up a whopping 10% -- from 2009's EVA of minus $3.3 million to 2010's EVA of $10.4 million and 2009 revenues of $142 million.

But the stock is really expensive -- trading at a Price/Earnings to Growth (PEG) ratio of 2.15 (where 1.0 is considered fairly valued). Acme Packet's P/E is 91.7 on earnings expected to climb 42.6% to $1.27 in 2012.

And if insider selling is any indication, Acme Packet executives have concluded that it's time to lighten up on its shares. For example, CEO Andy Ory -- he owns around 4.3 million shares -- sold 90,000 shares on June 16. That was way more than the 50,000 he sold the previous month and he's been selling shares every month since the beginning of 2011.

This is a good company that investors have noticed. At this high a PEG, it would need to fall much further while outperforming expectations to make its stock a good investment. If Acme Packet's CEO thought it could do that, he might be buying shares rather than selling them.


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