Neutral Tandem shares drop after downgrade

NEW YORK -- Shares of data services company Neutral Tandem Inc. dropped sharply to a new low Friday as R.W. Baird analysts downgraded the company's rating, saying its financial performance has weakened more than expected.

THE SPARK: Baird analyst William Power and his colleagues said the possibility has increased that Neutral Tandem's estimates of future earnings may not pan out. Although they still consider a buyout of the company to be possible, it can't be counted on, the analysts wrote in a note.

Neutral Tandem said Friday that it's in discussions with one of its biggest phone company customers in a contract dispute over long-distance voice traffic. The customer wasn't named. The company said it can't yet determine its potential loss from the dispute but that it could be substantial. The Baird analysts said the dispute adds to the pressure on Neutral Tandem from competitive challenges and squeezed profits.

THE BIG PICTURE: Chicago-based Neutral Tandem, which operates under the brand name Inteliquent, connects various phone companies so that a call from one can be accepted by another. Its customers include the major telecommunications companies.

The company's disclosure Friday of "active negotiations" with the large customer appeared to overshadow its announcement of a special one-time dividend of $3 per share, to be paid on Oct. 30.

Baird's Power said the dividend equates to $93 million in cash, which based on Neutral Tandem's June cash balance would leave it with $17 million in cash.

THE ANALYSIS: Power downgraded the company to "Neutral" from "Outperform" and reduced the 52-week price target to $10 per share from the previous $15. Baird estimates earnings at 59 cents per share for fiscal 2012, down from 81 cents per shares in the previous year.

SHARE ACTION: Neutral Tandem shares slid $1.40, or 15.5 percent, to $7.66 in afternoon trading after trading as low as $7.22 earlier in the session. That is an all-time low, according to FactSet.