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Stifel thinks Argon ST's (NASDAQ:STST) small SSTD deal is potentially worth much more in 2008 and beyond.

Last week Argon ST was awarded a $5.3 million contract modification to continue development work and sea trial certification of the AN/SLQ-25A/C, Surface Ship Torpedo Defense [SSTD] for the U.S. Navy to be completed over the next 14 months. The $5.3 million development contract itself is not material; however, since Argon ST is the sole-source provider for this device, a shift to product work could have a significant impact on revenue beginning in 2008 and continuing for an extended period.

There are about 200 25A units on U.S. Navy surface ships and 220 more deployed by allied forces. Firm thinks upgrade work on the 420 units to the 25C class could potentially be worth over $1 million per unit. In addition, they think it is highly likely that new 25C units will be produced. Stifel is not changing their forecasts at this time but believe more news is likely to surface as the development work and testing nears completion.

Firm's 12-month target price of $28 represents an EV/F07E EBITDA multiple of 13x. STST shares are currently valued at a multiple of about 11.5x. They think this is a conservative level as it is similar to that of Argon's public peers but far below recent M&A activity in the SIGINT/electronic warfare space. Maintains Buy.

Notablecalls: Interesting comments by Stifel's Stephen Levenson. I'd keep an eye on this one as the revenue impact could be a major one if Levenson's right. The chart looks like it wants to break out.

STST 1-yr chart:

STST chart

Source: Stifel Likes Defense Contractor Argon ST Following Torpedo Contract