Comtech Telecommunications: Buy At Book, Get One-Third Cash Rebate And 4% Yield

Comtech Telecommunications Corp. (NASDAQ:CMTL) designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. Its solutions play a vital role in providing or enhancing communication capabilities when terrestrial communications infrastructure is unavailable, inefficient or too expensive. CMTL conducts business through three complementary segments: telecommunications transmission, RF microwave amplifiers and mobile data communications. It sells products to a diverse customer base in the global commercial and government communications markets. The telecommunications transmission, RF microwave amplifiers and mobile data communications segments represented 49.1%, 24.1% and 26.5% of CMTL's 2012 sales respectively.

Executive Summary

CMTL is attractively valued at close to net asset value, representing a 23% discount to its five-year average P/B of 1.35x. CMTL's book valuation is backed by a significant net cash balance of $168 million representing 37% of its current market capitalization of $449 million. CMTL is putting cash to good use with dividends and repurchases. It sports a 4.3% dividend yield and is also currently authorized to repurchase up to $61.3 million of its common stock, equivalent to 13% of its market capitalization. CMTL is a leader in the markets it serves; it is a global leader in the single channel per carrier satellite earth station modems and the over-the-horizon microwave systems. It is also the leading provider of TWTA amplifiers for communications applications and solid-state, high-power broadband amplifiers.

Business Quality

CMTL maintains leadership positions in all three business segments in which it operates. In its telecommunications transmission segment, it is the leading provider of single channel per carrier satellite earth station modems and over-the-horizon microwave systems. In its RF microwave amplifiers segment, it is a leader in the satellite earth station traveling wave tube amplifier market and one of the largest independent suppliers of broadband, high-power, high-performance RF microwave amplifiers. In its mobile data communications segment, it is a key legacy supplier to the U.S. Army's war-fighter orientated satellite-based, tracking and communications system known as Blue-Force Tracking-1.

Notwithstanding the significant revenue contribution of U.S. government and prime contractors to the U.S. government, CMTL continues to diversify and expand its customer base. It has expanded its relationships with several U.S. agencies such as the U.S. Air Force, where CMTL's high-power amplifiers will be used in a major network expansion. CMTL is also working toward expanding its geographic distribution. For example, its satellite earth station products and high-power amplifiers are used by hundreds of mobile cellular network providers across the world.

While CMTL expects the mobile data communications segment to underperform as Movement Tracking System and Blue Force Tracking programs are in sustainment mode, it sees the telecommunications transmission and RF microwave amplifiers segment as long-term growth drivers. Demand for CMTL's satellite earth station modems is expected to be driven by growth in cellular backhaul revenue in emerging markets due to subscriber growth, growth in HDTV channels and more data-rich applications.

Also, in the RF microwave amplifiers segment, CMTL intends to capitalize on opportunities in electronic warfare applications through partnering arrangements with prime contractors. In fiscal year 2011, it received a multi-year award to provide high-power satellite amplifiers, which will be used in a major network expansion for the U.S. Air Force. CMTL is actively seeking opportunities to expand the business of outsourced manufacturing by prime contractors to the U.S. government, although revenue from outsourced manufacturing has historically been modest.

Valuation and Financial Analysis

CMTL is currently trading at a trailing twelve months P/E of 18.37 and a trailing twelve months EV/EBITDA of 4.12. CMTL's current P/B valuation at 1.04x represents a 23% discount to its five-year average P/B of 1.35x. CMTL is profitable and free cash flow positive for every single year in the past decade. For the last 10 years, CMTL has delivered gross margins and operating margins above 35% and 10% respectively. It also achieved a ROE of 6.1% for the past twelve months and a five-year average ROE of 10.1%. CMTL has a strong net cash financial position, with net cash of $168 million representing 37% of its current market capitalization of $449 million.

Capital Allocation

CMTL initiated quarterly dividends since 2011 and currently sports a dividend yield of 4.3% with a dividend payout ratio of 65%. The Board of Directors of Comtech is currently targeting to issue quarterly dividends totaling $1.10 per share per year.

On Dec. 6, 2012, CMTL announced that its Board of Directors has authorized a new $50.0 million stock repurchase program. Together with the new $50.0 million stock repurchase program, CMTL is authorized to repurchase up to an additional $61.3 million of its common stock, of which $11.3 million remains from CMTL's current $250.0 million stock repurchase program. It repurchased 7,055,614 shares of its common stock during fiscal year 2012.

Investment Risks

CMTL's business is heavily dependent on the U.S. government. Sales to the U.S. government, including sales to prime contractors to the U.S. government, accounted for approximately 48.9% and 61.7% of its sales for the fiscal years 2012 and 2011 respectively. U.S. government contracts depend on the approval by Congress of the necessary funding and termination for convenience provisions provide only for CMTL's recovery of costs incurred or costs committed, settlement expenses and profit on work completed prior to termination.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.