Technical Communications: An Undervalued Smallcap

Technical Communications Corporation (TCCO.OB) is an undervalued small cap stock, which just began its breakout on January 17th. Most good buys have both a fundamental and a technical picture which makes the stock appealing. This is no exception.

Fundamentals

One must first look at the small market cap of the company. At Thursday's close of $5.96, the company is worth a mere $9.12 million on a fully diluted basis. The company has 1.38 million shares basic and 1.53 million shares diluted as of the most recent SEC report. So, if this company is going to be a big winner, now might be the time to get in while it is still small and unexposed to the mass market.

Another great feature of this company is the balance sheet. The company has $0 of long term debt and $2.62 million in cash, or $1.71 a share. Current assets are over 5 times that of current liabilities. If one is looking for a company with a pristine balance sheet, TCOO clearly has this advantage. Another important figure is the rate at which cash has grown. Over the past three years cash ahs grown from $1.2 mil to $1.87 mil to $2.62 mil. Eventually the company will want to do something with the cash, be it growth, special dividends, or share buy backs.

Last but not least on the fundamental side is earnings and sales. Here is a picture of the last 4 quarters:

Sales

• $ 1.75; $ 0.84; 108%
• $ 1.12; $ 1.13; -1%
• $ 1.29; $ 1.00 29%
• $ 0.76; $ 0.91; -16%

Earnings per share

• Q4 .34 vs. .04
• Q3 .07 vs. .07
• Q2 .20 vs -.12
• Q1 -.09 vs -.08

As one can see the company had two weak quarters and two good quarters this last year. The biggest contributor to the difference are large orders for the company's products. In the last part of this last fiscal year the company announced two large orders which were the driving force behind the company's 4th quarter earnings and sales spike. Even with parts of these contracts executed, backlog stands at $3.7 million at fiscal year end, well over the $1.0 million seen at the end of fiscal 2006.

For the trailing twelve months the company's tally is $0.55 per share in earnings, giving the company a PE of 10.8 as of Thursday's close. Assuming earnings growth of 50%, which is entirely plausible given the company's backlog, the year end 2008 numbers could swell to over $3.5 million in cash and over $0.82 a share in earnings. Assuming this, the forward PE is around 7.3. Now take 20 times trailing earnings and 20 times forward earnings and one comes up with a reasonable price range of $11.00 - $16.40 a share, much higher than the current price. No matter where in the range the stock ends up, it is clear the company is worth at least twice what is currently being paid.

Technicals

After finding the one with the good fundamentals, one must buy at the right time. To this end, TCCO's Thursday volume was over twice that of any trading day in the past three years. The 95,284 shares traded was fully 6% of the total shares of the company and probably over 10% of the float.

On Tuesday the largest holder of TCCO moved shares from one management company to another management company, causing a spike in volume. It is hard to tell whether this has any bearing on the future price of the company, but it does great some extra volume on the week. In contrast, the volume on Thursday was broken up into smaller trades. as the company moved out of a base.

The base is a rough cup and handle, but as small caps go the cop and handle looks well formed. Generally speaking, cwh breakouts jump 10%-40% or more on the initial breakout. If all goes well, this company could jump more, given the large amount of volume and the great fundamentals of the company.

Conclusion

I am long and hoping for $12-$15 out of this company. I see the shares continuing to breakout and head higher over the next week or so, possibly hitting $8 before it consolidates or slows down. Perhaps in 3 months, after the earnings report in mid-February, the company will have more than doubled from its current price of $5.96.

Disclosure: Author has a long position in TCCO.OB

Comments

[Spiral13:]

I would really like to know what program/s their revenue is derived from.

Aug 21 03:20 PM