Radyne Corporation: Profits Humming Along

| About: Radyne Corp. (RADN)

Satellite communications equipment supplier Radyne Corporation (RADN) delivered another strong quarter, surprising the Street with $0.17 EPS versus the consensus estimate of $0.15 in the second quarter 2006. Earnings were boosted by robust performance in both the satellite electronics and amplifier product lines.

Revenue of $34.6 million was $2.6 million better than we expected. Sales in the “satcom” and “amplifier” segments grew 9.5% and 12.6% year-over-year, respectively. While gross margins of 41.6% were worse than we expected (42.8% was embedded in our model), total operating margins were slightly better than forecast. Cash at the end of June 2006 was $24.9 million. We estimate cash flow from operations was near $3.0 million.

In our view, the quarter results demonstrated that Radyne’s “profit machine” is still humming along. In our view, the Company’s competitive strength and earnings capacity have never been stronger. In the most recent Crystal Equity Research report on Radyne we discuss several recent commercial contract wins and product introductions to support our view. Radyne’s position in the military market got a boost last month from a $5.3 million subcontract with L-3 for DMD-2050 modem and Xicom amplifiers for satellite system terminals. There is potential for $60 million to $80 million in revenue over the next five years.

Management reaffirmed previous guidance of $125 million to $135 million for 2006 sales, but suggested 2Q06 performance will propel sales near the top of the range. We updated our earnings model to reflect 2Q06 results and made no changes to sales or profit assumptions in the second half of the year. Our updated 2006 sales estimate is $137.8 million, providing net income of $12.8 million or $0.69 per share.

We maintain our Buy rating and $19.50 price target, which assumes that RADN is fairly valued near a PEG ratio of about 1.0 (assuming a five-year CAGR of 25%) on our 2006 and 2007 EPS estimates of $0.67 and $0.86, respectively.

RADN 1-yr chart: