Radyne-o-mite (RADN)

| About: Radyne Corp. (RADN)

Radyne investment thesis in one sentence?

Radyne makes and sells the world's best satellite communications equipment and stands poised to benefit from increased data transmission worldwide and the rollout of HDTV in the US.

Radyne Corporation, formerly Radyne Comstream, used to be such a quiet little section of my portfolio. I bought it what seems like ages ago and nearly forgot all about it. They make communications equipment, primarily satellite modems and ground stations and the associated encoders, etc. used in satellite communications -- and they have some of the best products and best international distribution in the world, as far as I can tell.

This is one of the smaller companies in my portfolio, at under 200 Million in market cap, even with the run up following earnings, but it trades at a pretty low PE ratio thanks to a very checkered past. This was a recommendation from Motley Fool's Hidden Gems ages ago. I'm not sure when they first recommended it ... but I'm glad they did as it brought lovely Radyne to my attention.

They announced a big order recently but that wasn't what sent the stock climbing nicely during the last week or so, then blitzing up the charts in after hours trading on Wednesday evening. What did that was earnings, and especially earnings growth. The after-hours trading moderated a bit when we opened on Thursday morning, but still up significantly in the $11 range.

A few months ago Radyne decided to buy Xicom, a similar provider of satellite telecom gear that filled some holes in their product line and allowed them to really sell a full line of products. It's always nice if you can satisfy all of your customers' needs. Radyne had been a profitable, specialty niche company unti this point, and in retrospect it looks as though the acquisition came along at a perfect time -- strengthening the product lineup just as business is getting ready to (possibly) dramatically pick up.

What does Xicom do? As I said, they provide a more diverse product line -- they are the world leaders in satellite amplifiers, which is a perfect fit with Radyne's products -- and an established customer base. They bring a different customer mix to the table as well, with much more government business and a larger proportion of domestic business to offset Radyne's international strength.

You see, satellite communications is just a very, very good idea -- it's the least expensive way to blanket the globe, and it can be used for all kinds of digital communications, whether it's telephone, data, TV service a la DirecTV, military command and control, or, in perhaps the most important case for Radyne, television feeds.

Television feeds, as on the stuff they've been sending via satellite for ages now -- the latest NBA game broadcast live from the arena, news reports from a lone reporter on the campaign trail with a van, camera and Radyne satellite connections (in Idaho or India), etc ... and they also sell HD and standard digital television encoders that are integrated with the satellite base stations and receivers.

And that's a big part of the-short term Radyne growth story -- digital and High Definition TV. I know, this is a growth story you've heard before, the promise that HDTV is "just around the corner" has been with us for at least a decade. But this time it's a little different. Your neighbor probably has one if you don't. They're selling them at Best Buy; and they're the huge, sexy flat screen TVs that everyone drools over. That's the market that Radyne's advanced satellite equipment can help serve. And they noted during the earnings call that they'll soon have another big order in hand, this time for just that market.

Earnings are well diversified around the world and in various industries -- for the core satellite communiations division the split is close to 50/50 between domestic and international business, though so far the vast majority of their domestic business is government and military related. There's certainly room to grow almost everywhere with the demand for data transmission -- not just audio, video and telephone connections are needed around the world, but internet growth is, of course, still dramatic -- and Radyne makes modems that make internet data transmission via satellite possible, too.

The split for HDTV and related products and services is much more US-centric right now -- more than 80% of that business is domestic, but although it's growing quickly domestically (and we might expect some spikes in the growth this fall as we prepare for the congressional mandate for digital HD transmission by January), Radyne expects that international markets will make up the majority of their revenue in this segment, too, in a few years. I read that as good diversification of markets, and great growth, as well as a great way to leverage their strong international distribution network.

So, should I continue to hold this paper profit?

I always question myself when a stock I like long term but didn't expect to wildly outperform the market has a huge tick up -- should I sell? And almost always, the answer is no. It's true that no one ever went broke taking a profit, but I've got my 401K sitting in the corner virtually untouchable, marching along and matching the market step for step -- with my individual stock selections, I'm not worried about going broke, I'm worried about catching the rocket ships. And just because I wasn't thinking Radyne would rocket like this in the short term doesn't mean I'm not ready to go along for the ride. And I don't much like the tax and transaction cost implications of trading in and out, even if you're pretty sure you can time the moves perfectly.

Radyne has had three years of pretty flat revenues, but steadily growing earnings following their return to profitability three years ago. The house seems well in order, and we're now at an inflection point where it seems they are ready to grow significantly to meet the demand for their products. Sales were 71% higher this quarter than last year. Order backlog is at $30 million now, more than their total sales were for the first half of 2004.

Now the bad news:

I loved this company when I bought it because it seemed to be poised to benefit from the long term trend toward increased and more sophisticated satellite communications in general, and broad rollout of HDTV specifically, AND because they had tons of cash in the bank, were growing earnings, and were debt free.

But they're not debt free anymore, and they have little cash left. Not that they're in trouble by any means, but they spent all their available cash and went into a little debt to buy Xicom ... I think that's going to turn out to be a great decision, but it does make them a little bit riskier as they don't have that $40+ million cash hoard to fall back on anymore.

But I'm not selling. I'm going to try to pretend that Radyne is still the sleepy little company I bought in January and ignore it for the most part -- a strong position in a growing industry is not somethign to walk away from, especially if you can get it at a discount both to the overall market and to the company's growth rate.

Investor presentation available on their website, as is the Xicom explanation -- definitely worth a read.

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