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Comtech Telecommunications Corp. got hammered

|Includes:Comtech Telecommunications Corp. (CMTL)

Comtech Telecommunications Corp. (NASDAQ:CMTL) develops and markets products, systems and services for communications solutions. CMTL addresses three business segments: telecommunications transmission, mobile data communications, and radio frequency (NYSE:RF) microwave amplifiers.  Its customer base is diverse and includes global commercial and government communications markets.  On Wed July 21, 2010, Comtech Telecommunications Corp. (CMTL) disclosed that they had been advised by the U.S. Army Contracting Command-CECOM Contracting Center that it was not selected as the program manager and vendor for the Force XXI Battle Command Brigade and Below, Blue Force Tracking 2 program.  CMTL has also been advised that a third-party vendor has been awarded $249.9M which is about 50% lower than the total price of CMTL’s BFT-2 proposal.  Based on the $249.9M award, the BFT-2 program will spend about $41.7M a year for six years on BFT-2 services and hardware.  The loss of this award means CMTL will not be able to include this amount in its future revenue projections.

From CMTL’s press release:  “Comtech's current BFT-1 contract of $384.0 million enables the U.S. Army to place orders through December 2011. Total orders received to date against the BFT-1 contract are $262.7 million. Comtech's existing BFT-1 program is expected to generate approximately $50.0 million of revenue in fiscal 2010 of which approximately $30.0 million relates to satellite network bandwidth and network operational services. Assuming the BFT-2 contract award is not overturned, Comtech anticipates that BFT-1 satellite network bandwidth and network operational services will approximate $30.0 million in annual revenue for fiscal 2011 and will decline thereafter through fiscal 2015. The ultimate amount of BFT-1 revenue in any future fiscal year will likely depend on the speed of the transition to the BFT-2 network and future U.S. Army operational needs. In addition, the Company expects to continue to perform and generate revenue under its current MTS contract as well as participate in the solicitation process for the next-generation MTS contract.”

The President and Chief Executive Officer of CMTL, Fred Kornberg, said, "Given our proven performance during a war-time environment, the performance capability of our BFT-HC transceiver and our belief that Comtech offers a lower overall program risk to the U.S. Army as well as other factors, we anticipate protesting the award given to the third party."

At the close of Wed, CMTL’s stock dropped by about 32%.  The next day, it continued to drop and set a new 52-week low at $20.60.  Last Fri, it recovered somewhat to close at $21.73.  To determine whether CMTL was oversold, one needs to evaluate the impact of CMTL not being selected for the BFT-2 contract.  In the following, I will focus on the impact in 3 key areas.

1. Impact on revenue.

CMTL’s revenue has been consistently increasing year to year.  Using CMTL’s 2009 fiscal year revenue of $586.37M for both the commercial and military sectors, the contract loss of approximately $41.7M makes up only about 7.1%.  Assuming no revenue growth in the unlikely scenario, this supposedly 7.1% future revenue drop certainly does not justify a 30% drop in the stock price.

2. Impact on cash flow.

Because CMTL’s existing BFT-1 contract continues to add to CMTL’s cash flow through the end of 2011 and beyond, its cash flow should be basically unaffected for the near future.  CMTL is currently trading close to its cash per share value of $20.07, making the stock price ridiculously cheap, especially for such a proven company with consistently high profit and high growth.  Although much of its cash reserve will be used to purchase CPII, the purchase will solidly increase CMTL’s revenue, profit, and cash flow, while cutting costs and reducing inefficiency.

3. Impact on future Army contracts.

An argument can be made that the rejection of CMTL’s BFT-2 proposal could lead to future rejections of other proposals.  This seems to me to be highly unlikely for 2 reasons:  First, government contracts and grants tend to be determined case by case, based on the requirements and merits of each proposal.  Second, the rejection was not caused by low quality or inadequacy of CMTL’s products and services.  In fact, according to CMTL’s President and CEO’s statement above, CMTL’s products and services are more proven with lower overall risk.  Rather, the rejection was based solely on price.  If CMTL wants this or other Army’s grants bad enough, there’s no reason it could not simply reduce its price to get accepted.  Of course, CMTL may not want to do this because of lower profit margin, but the key is that reducing its price always remains available as an option for CMTL.


Because the impact of the lost future contract BFT-2 in the areas of revenue, cash flow, and future Army contracts appears to be small, the huge drops in CMTL’s stock price the last few days seem to be overdone.  In fact, CMTL plans to appeal to the Army so the BFT-2 contract loss may not even be a certainty.  But, assuming the worst-case scenario, CMTL should have dropped only between 7-10%, giving it a fair value at around $27-28.  According to Yahoo Finance, the average analyst target price currently is around $30-33.

Disclosure: Long CMTL
Stocks: CMTL