Sunday, April 25, 2010

Comtech Telecomm Corp.

Comtech Telecommunications Corporation “designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. The Company conducts business through three complementary segments: Telecommunications Transmission, Mobile Data Communications, and RF Microwave Amplifiers.”

The telecommunications transmission segment consists of satellite earth station equipment with satellite modems and over-the-horizon microwave systems. In 2Q10, telecom transmissions contributed 34.1% to total revenue.

The mobile data communications segment consists primarily of MTS and BFT real-time and secure systems sold to the U.S. Army. This segment also includes microsatellite systems and related components. Mobile data contributed 49.2% to total revenue in 2Q10.

The last segment, RF microwave amplifiers contributed an additional 16.7% to total revenue.

Overall, 64.7% of total sales was derived from the U.S. government and an additional 29.2% came from international sales. The balance, 6.1%, came from domestic commercial sales.

Recent Developments

Comtech Telecommunications Corp announced on April 5, 2010 that its Santa Clara, California-based subsidiary, Comtech Xicom Technology, Inc. and its Tempe, Arizona-based subsidiary, Comtech EF Data Corp., received satellite communications equipment orders totaling $12.1 million from a major government prime contractor.

The orders are for follow-on procurements of high-power tri-band amplifiers, high-power Ka-band amplifiers and satellite earth station modems for transportable USAF satellite terminals and will be utilized to expand an existing military network. Deployed throughout the world, these terminals offer users the flexibility of accessing both military and commercial satellites.

On March 31, Comtech Telecommunications Corp. announced that Comtech Systems, Inc., its Florida-based subsidiary, received a $35.4 million contract from a domestic prime contractor to provide system design and telecommunications transmission equipment for use in a North African government's communications network.

Comtech Telecommunications Corp. announced today that its Maryland-based subsidiary, Comtech Mobile Datacom Corporation, received an order totaling $1.4 million under its Movement Tracking System, or MTS contract, with the U.S. Army. Total orders received to date against the $605.1 million MTS contract increased to $595.2 million.

The order is Phase II of ongoing efforts to complete migration of all RFID processes to the new international standard ISO/IEC 18000-7. Whereas Phase I migration efforts involved modifications to the transceiver's firmware to enable it to read RFID tags operating under the ISO 18000-7 standard, Phase II encompasses modifications to the MTS platform application program, network, and other interfaces. Upon completion of the migration, the MTS mobile RFID capability will extend to all active RFID tags built to comply with the international standard.

By The Numbers

Sales for the TTM ending 1/10 are down to $555.5 million for FY09 levels of $586.6 million. Y-O-Y, sales are down 7.5%. However, we are beginning to see pick-up. In the quarter ending 1/10, sales were $171.1 million as compared to the year-ago quarter of $143.9 million.

At the segment level, we are seeing changes too. In 2Q10, sales in the telecom transmission segment declined to $58,463 million from $69,523 million in 2Q09. There was a dramatic increase in the mobile data segment. Sales increased from $38,871 million in 2Q09 to $84,186 million in 2Q10. There was a 20% decrease in the RF microwave segment. In 2Q10, sales decreased to $28,483 million from $35,492 in 2Q09.

EPS for the TTM ending 01/10 are down to $1.31 compared to the year-ago level of $2.57. In 2Q10, EPS was $0.51 as compared to $0.46 in 2Q09.

Earnings estimates for FY10 range from a low of $1.88 to a high of $2.28 with a mean of $1.95. The Company provides guidance with a range of $1.85 to $1.95. Estimates for FY11 range from $1.88 to $2.69 and average $2.20.

Gross margins for fiscal years 2005 to 2009 range from 40.7% to 44.2% and average 42.16%. The gross margin for the TTM ending 01/10 is down to 37.4%. We see similar patterns for operating margins and net margins.

The Company has a very strong balance sheet. The Company reports $514 million in cash which also represents approximately 55% of the current market cap. With so much cash on hand, it is no surprise the Company has announced its interest in making acquisitions.

The Company carries about $200 million in long term debt and $310.0 million in total liabilities. The total liabilities to total assets ratio of 32%; long term debt to capitalization ratio of 23.3% and long term debt to equity ratio of 30.3%.

At current EPS levels, valuation seems a little high at 24.8X. If the Company can hit the average EPS estimate of $1.95, then the P/E of 16.7X seems reasonable. Price to Book is 1.3X and Price to Tangible Book is 2.0X.

Conclusion

The Company has good fundamentals and upside of about 27% from current levels. We think the current price is a little ahead of itself. We would wait for a pullback to about $27 before buying.

Disclosure: Author has no financial interest in CMTL.

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