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Theme III — Military spending and CMTL
Another trend I see stemming from the recent Presidential election concerns the military. If there's one thing you can count on, it's Congressional spending. And one issue on which both the President and Congress will agree is the military. There's no company better positioned to take advantage of defense spending on tech than Comtech Telecom (CMTL:NASDAQ).
Early in 1999, Comtech Mobile Datacom, a wholly owned subsidiary of Comtech Telecom, led a team of two other companies to win a bid for the U.S. Army's Movement Tracking System. The Army will use this system to track its assets and allow real-time communication between fixed and mobile command centers. And the contract is juicy — up to US$418 million over the next eight years.
Comtech has already taken its first order of US$3.1 million on this contract, and I expect to see a minimum of US$75 million more over the next two years. And no part of this contract is priced into the stock now. In fact, Comtech is still the most undervalued telecom equipment stock I know of. Here's what I mean:
Earnings explosion
Comtech's fiscal year revenues leapt 75% to US$66.4 million. Excluding some one-time charges related to the EFData acquisition, net income was up 140% to US$4.2 million.
Of course, those non-recurring charges were US$10.4 million which put the company in the hole by nearly US$4 mill. But the nice thing about non-recurring charges is, they only happen once.
As of July 31, backlog had risen 31% to US$50 million. The nice thing about backlogs is they give you a hint of what earnings will look like in the future. All in all, Comtech did very well. But don't forget — this jump in revenues is only partially related to the EFData acquisition, which was a part of Comtech for just three weeks.
Fourth quarter revenues jumped from just under US$10 million last year to over US$25 million. Assuming this keeps up, we're looking at revenues of over US$100 million on an annualized basis. Comtech is currently carrying a US$120 million dollar market cap, which means it's trading for just over 1X 2001 sales.
That, to me, represents an inefficient market. Comtech's valuation simply has to rise. US$30 a share in 2001 is not out of the question.
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