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.

Sunday, April 4, 2010

The Game Is Not Over For GameStop Corp.

Company Profile

GameStop is the world's largest video game retailer. The company operates 6,450 retail stores throughout the United States, Austria, Australia, Canada, Denmark, Finland, France, Germany, Italy, Ireland, New Zealand, Norway, Portugal, Puerto Rico, Spain, Sweden, Switzerland and the United Kingdom. The company also operates an e-commerce site, GameStop.com, and publishes Game Informer(R) magazine, a leading multi-platform video game publication. GameStop Corp. sells new and used video game software, hardware and accessories for video game systems from Sony, Nintendo, and Microsoft. In addition, the company sells PC entertainment software, related accessories, and other merchandise.

Investment Thesis

The big question is whether GameStop is a value trap. The videogame industry suffered through most of 2009. During the first nine months of 2009, sales dropped 8 percent below 2008 levels. The holiday season saw a major uptick in sales and the industry was able to report Y-O-Y sales 4 percent higher than 2008. Hardware sales were particularly strong with revenue growth of 16 percent. The major beneficiary in this category was Nintendo’s Wii. Significantly, Sony’s Playstation outsold Microsoft’s Xbox 360.

GameStop has provided us with guidance for 2010.

For fiscal 2010, based on current market trends, GameStop expects the following:

  • Total sales growth between +4.0% and +6.0%
      • New hardware: -5.0% to -15.0%
      • New software: +2.0% to +5.0%
      • Used products: +5.0% to +10.0%
      • Other: +5.0% to +10.0%
  • Comparable store sales of 0.0% to +2.0%
  • Diluted earnings per share ranging from $2.58 to $2.68, an annual increase of +14% to +18%, based on expected outstanding diluted shares of 155,000,000.

During the year, GameStop intends to execute our previously announced capital allocation plan, which includes the following cash deployment:

  • $75 million in the opening of 400 new stores
  • $125 million in store improvements, information system support, refurbishment upgrades, distribution expansion and loyalty program enhancements
  • $100 million reserved for acquisition and investments
  • $300 million for share repurchases

Based on our current financial projections, the company forecasts it will end fiscal 2010 with $900 million cash on hand.

For the first quarter of fiscal 2010, the company expects comparable store sales to range from -3.0% to 0.0%, driven by reduced hardware price points compared to last year. Diluted earnings per share are expected to range from $0.46 to $0.48, a 7% to 12% increase over the prior year quarter.

Note that guidance does not include debt retirement costs.

The Company also embarked on a $300 million share buyback program. GameStop has already purchased 12,642,200 shares at a cost of $247 million.

By The Numbers

Y-O-Y, sales grew 3.1% from $8,805.9 million to $9,078.0 million. For the quarter ending 1/10, sales reached $3,524.0 million as compared to $3,492.1 million for the quarter ending 1/09. As reported by Thomson Reuters, analysts project FY 11 sales in the range of $9,222.3 million to $9,613.8 million with a mean of $9,431.22 million. Based on our own analysis, Measured Approach estimates FY 11 sales of $10,589.59. Our sales growth estimate reflects a 16.6% growth rate. This compares with a three growth rate of 19.5%, a five year growth rate of 37.6% and a seven year growth rate of 31.3%.

Historically, GameStop’s sales growth rates have outpaced its industry median. The industry median company has grown sales at the rate of 1.2%, 3.7%, 7.5% and 9.4% over the past one year, three year, five year and seven year periods, respectively.

Operating income declined in FY 10 to $631.7 million from $672.8 million in FY 09. Net income also fell. Net income fell from $398.3 million in FY 09 to $377.2 million in FY 10 or 5.3%. The Company reported EPS of $1.29 (MRQ) as compared to $1.39 in the comparable year-ago quarter. This represents a 7.2% decline in quarterly earnings.

Analysts are estimating FY 11 EPS in the range of $2.55 to $2.70 with a consensus estimate of $$2.63. Based on this estimate, the forward-looking PE is approximately 8.5X. Measured Approach’s estimate of FY 11 EPS is consistent with the analysts at $2.69. If Measured Approach is correct, we will see a 17.5% growth in EPS which would be supported by our estimate of sales growth.

With the increase in sales in FY 10, we were pleased to see that inventory to sales decreased to 11.16% from the FY 09 level of 12.22%. This is an indication that the Company is not expanding its inventory beyond what is necessary to maintain product in its stores.

GameStop reported a dramatic increase in cash and short-term investments in FY 10. Cash and short-term investments grew to $905.4 million in FY 10 as compared to $578.1 million in FY 09. As stated above, the Company is using this cash to buy back stock which increases shareholder value. The company is also paying down long-term debt. The long-term debt to capital ratio has declined to 14.1% as reported for the quarter ending 1/10 in comparison to 19.4% as reported in the quarter ending 1/09. These are good uses the excess cash. Long-term debt decreased to $447.3 million from $545.7 million. Overall, the balance sheet is solid.

Valuation

GME is currently trading at about 8X projected earnings, a significant discount to the S&P 500. The current multiple of 10X is below the industry median. GME has historically traded at a premium to its industry median. If we applied the industry median of 13.8X to GME’s TTM’s EPS of $2.29, we get a value of $31.60.

On a price to book basis, again GME is selling at a discount to the industry median. If we apply the industry median PB to the Company’s book value for the MRQ, we get a value of $29.85. Historically, GME has a PB ratio in line with the industry median.

GME has a current price to sales ratio of 0.4X. The current industry median PSR is 0.7X. Applying this metric to GME, we get a value of $38.68.

Conclusion

We need to answer the question asked earlier. Is GameStop a value trap? We do not think so. We think the huge installed base of video games provides a foundation for continued growth for GME. We also think that as long as Nintendo, Microsoft, Sony and the other major players continue to introduce new hardware with more features, the base will continue to expand. Online gaming is a danger going forward that dampers our enthusiasm. Our target price of $31.35 is about 11.65X our FY 11 EPS estimate and about 10.X our estimate of free cash flow.

Disclosure: At the time this article is written, the author has no position in GME.

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